Instead of withdrawing money from your IRA, you might convert part of your traditional IRA to a Roth IRA. Suppose, for example, you expect to have $50,000 in taxable income on a joint return this year. You and your spouse might decide to convert a total of $9,400 worth of your traditional IRA money to Roth IRAs in 2005.
Such a conversion triggers taxable income but you will have to pay only $141 in tax–15 percent of $9,400–because you’ll still be in the 15 percent tax bracket, which goes up to $59,400 on a joint return in 2005.
Similar conversions can be done in future years, if you’re in the 15 percent tax bracket. After five years, and age 59 1/2, all withdrawals from a Roth IRA will be tax-free. The clock starts on January 1 of the year you first create a Roth IRA.
Say you convert $9,400 of your traditional IRA to a Roth IRA on December 30, 2005. Your start date is January 1, 2005, for the purpose of this five-year rule. Thus, after January 1, 2010, you can take any amount from your Roth IRA, tax-free, as long as you’re over age 59 1/2.