Roth Conversions

For some investors, a Roth IRA may provide greater after-tax income during retirement than a Traditional IRA. While converting to a Roth is a taxable event, the benefits may outweigh the tax consequences for many. Additionally, tax laws that previously prevented higher-net-worth investors from converting to a Roth have changed. Regardless of your annual income or tax-filing status, you can convert a Traditional IRA to a Roth.

You also can convert your SEP or SIMPLE IRA to a Roth, or roll over funds from an eligible employer retirement plan, such as a 401(k). We can discuss Roth conversions with you in more detail.

Roth Conversion Benefits

  • Tax-free Withdrawals During Retirement – Any qualified withdrawals from a Roth IRA during retirement are tax free.
  • Protection Against Future Tax-Rate Changes – Because you don’t pay taxes on Roth withdrawals in retirement, you may avoid the risk of future tax-rate changes.
  • Tax Diversification – One strategy for retirement investing is to incorporate tax diversification – taxable, tax deferred and tax free – to your portfolio. Converting your Traditional IRA to a Roth is one way to achieve the tax-free income component.
  • Withdrawal Flexibility – You don’t have to take a required minimum distribution on a Roth IRA at age 70 ½. And, you can continue to contribute to your Roth as long as you have earned income.
  • Legacy Planning – Unlike a Traditional IRA, a Roth IRA allows you to potentially leave a tax-free asset to your heirs. A Traditional IRA will be taxable at your beneficiary’s marginal income-tax rates.

Before converting, consider:

  • Current and future income tax rates.
  • Current age and life expectancy.
  • Ability to pay the taxes due on a conversion from a source other than your IRA.
  • Anticipated spending needs during retirement.
  • Other sources of retirement funds and retirement income – pre-tax and post-tax.
  • Age and life expectancy of beneficiary(ies).
  • Type of contributions made – deductible and/or nondeductible – and IRS rules governing partial conversions.

Special Recharacterization Provision

After you convert you may revert back to a Traditional IRA. Known as recharacterization, the transaction must be processed by October 15 of the year following the year of the conversion.

A Roth conversion might not be a favorable strategy if any of the following apply:

  • You are unable to pay the tax bill for the Roth conversion from a source outside of your IRA.
  • You are nearing or are in retirement and intend to fund all or a large portion of your retirement income with your pre-tax retirement savings.
  • You feel your tax bracket is likely to drop during your retirement years.
  • The conversion will put you in a higher tax bracket. If this is the case, you might consider a partial conversion.
  • You have named a tax-exempt charity as beneficiary of your IRA.

Roth conversion analysis is complex. You may want to consult with your tax advisor as well.