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.