Convert To A Roth IRA

SHOULD YOU CONVERT TO A ROTH IRA?

Practical guidance in deciding whether a Roth IRA conversion from another retirement account makes sense for you.

Roth IRA accounts have become very popular these days and with good reason.  They offer tax free investment growth and income.  What’s not to like?  But many have jumped on the Roth conversion band wagon without really looking to see if they will benefit as much as they believe.

A Roth IRA conversion is where a taxpayer moves money from their pre-tax retirement accounts such as a 401k, 403b, traditional IRA or rollover IRA into a qualified Roth IRA.  Typically this results in the taxpayer recognizing income on the amount transferred from the pre-tax retirement account to the Roth.  So there are consequences to their action and a primary motivation for “looking before you leap!”

The decision of whether to make a Roth conversion is a complicated one.  Furthermore, each and every client’s financial and personal situations are different.  They have different needs, different objectives and very different timelines.  Someone who is 68 with a $20 million estate is significantly different from a 55 year old who just retired or a widow facing a change in filing status and higher tax rates.

The analysis looks closely at your objectives, timeline, tax bracket, net worth and financial needs for everyday living just to name a few.  Here are a few of the questions we pose:

  • Do you anticipate being in a much lower tax bracket in the future?
  • Do you plan on making substantial charitable bequests from your retirement accounts when you die?
  • Do you need IRA funds to meet your annual living expenses?
  • Do you have the financial wherewithal to pay the taxes on a Roth conversion?
  • Do you have a long time horizon to let the Roth investments grow?
  • Do you plan to use your Generation Skipping Tax exemption with your IRA assets?
  • Do you have other tax attributes that can help offset the tax impact of a Roth  conversion (net operating losses, charitable contribution carryforward, etc.).

We then consider the eleven reasons to convert to a Roth IRA.  We are determining the motivation driving the decision whether to convert or hold back.  Keep in mind that almost all Roth conversions are “partial” conversions.  Typically, partial conversions provide a better quantitative outcome versus converting it all in one event.

Keep the Roth IRA basics in mind.  These are reasons why Roth IRAs are so attractive and here are just a select few:

  • Roth IRAs are not subject to required minimum distributions [RMDs] when you reach age 70 ½.
  • Roth conversions can be “recharacterized” in whole or in part to achieve the maximum tax and conversion result you were looking to achieve.  [Up until October 15th extended due date of your tax return].
  • A Roth IRAs is a valuable tool in managing your adjusted gross income to help control Medicare premium costs, AGI phase-outs, staying out of higher tax brackets, etc.
  •  Roth IRAs are excellent vehicles to generate tax-free income to your beneficiaries for decades to come.
  • Roth IRA distributions avoid the 3.8% Net Investment Income Tax [NIIT].

To summarize, Roth IRAs are terrific ways to save and invest while minimizing your tax liability over the long-term.  Converting from a traditional IRA to a Roth is not a “no-brainer” decision.  Carefully consider the short and long-term impacts before you take action.

Our firm provides Roth IRA conversion analysis services.  If you are interested in letting us provide advice and guidance on your path to making a Roth conversion decision, please contact us for a preliminary interview.



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