Many investors make an IRA rollover to Roth IRA because they are attracted to the tax benefits of Roth IRA distributions. Roth IRA is not the same as Traditional IRA and other types of IRA and while it is more complicated to understand, once investors understand how a Roth IRA works, they usually prefer it to a traditional IRA if they qualify to open a Roth IRA.



A Roth IRA differs from other types of IRA such as traditional IRA and SEP IRA. A traditional IRA is available for anyone with earned income whereas an investor needs to earn less than a certain amount to qualify to open a Roth IRA. Sometimes, an investor qualifies to open a Roth IRA and then earns too much to contribute later on.

Investors who make an IRA rollover into Roth IRA love the tax benefits that accompany Roth IRA. Contributions and earnings in a Roth IRA are tax free when withdrawn after 5 years and when the owner is 59. In comparison, withdrawal of earnings from a traditional IRA are taxed as ordinary income. Investors who think that they will be in higher tax bracket in the future prefer to pay tax now and invest in a Roth IRA.

Contributions to a Roth IRA are after tax contributions. That means if you make an IRA rollover to Roth IRA with pre-tax money then you need to pay tax on that amount of money in the year you roll it over into a Roth IRA. Direct contributions to a Roth IRA may be withdrawn at any time with no tax or penalty because it is already after tax money. This exemption does not apply to rollover amounts.

In the same way as a Traditional IRA, the contribution to a Roth IRA is restricted by the Internal Revenue Code such as $5,000 in 2008. If an investor has more than one IRA, then the total amount of contribution to all IRA including Roth IRA cannot exceed the Internal Revenue Code's limit.

Even though there are obvious benefits to making an IRA rollover to Roth IRA, some investors prefer to rollover over into traditional IRA because of the tax benefits now. When investors want to pay less tax today, they can put as much money into a traditional IRA as they can afford. Paying tax later is a key incentive for many taxpayers.