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Is a Roth Conversion Right for You?

Roth individual retirement accounts have emerged as a popular tax-sheltered way to invest, and they'll only get better next year.

Starting in January, Congress will drop the eligibility barriers so that any investor, regardless of income, will be able to transfer money from traditional, deductible IRAs to a Roth.

Why do so? Because money in a Roth ultimately can be withdrawn completely tax-free, whereas traditional-IRA withdrawals are taxed as ordinary income.

About four in 10 Americans own at least one IRA, reports Fidelity Investments.

Investors who make the switch from a traditional IRA will need to pay taxes as part of the conversion process, but financial advisers say the move still makes a lot of sense for certain investors, especially those who see tax rates rising in future years. On the other hand, converting may not be feasible for someone who couldn't afford to pay the associated tax bill or who might be pushed into a higher bracket in the process.

You also can convert a nondeductible IRA to a Roth. Nondeductible IRAs historically haven't been popular because they don't offer a front-end tax benefit. But opening and then converting one into a Roth offers a back-door way for upper-income taxpayers to get in.

Single people earning $116,000 or more ($169,000 for married couples) can't contribute directly to a Roth but can open a nondeductible IRA.

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