Should you consider a Roth IRA conversion?

| September 13, 2019

Roth Conversions

Would converting from a traditional IRA/401(k)/403(b) be a smart move for you?

A Roth conversion refers to taking all or part of the balance of an existing traditional IRA/401(k)/403(b) and moving it into a Roth IRA.

Why you might want to convert.

Tax free withdrawals in retirement.

When taking withdrawals from a traditional IRA you have to pay taxes on the money, including earnings and contributions that were originally deducted on your taxes.

In a Roth IRA, as long as the account has been open for 5 years and you are 59.5 or older all the money comes out tax-free.  If you are under 59.5, the money you contributed may come out tax and penalty free however gains may be taxed and penalized.

Watch your money grow tax-free for longer.

Traditional IRA force you to take required minimum distributions (RMD) every year after you turn 70.5, whether you need it or not.  At that point, you lose the tax-free growth on the money that has been withdrawn.

On the other hand, Roth IRA’s do not have RMD’s during your lifetime, so the money can stay in the account and keep growing tax free.

Leave a tax-free inheritance to your heirs

Those who inherit your Roth IRA will be required to take a RMD, but they will not pay any income tax on the withdrawal as long as the account has been open for at least 5 years.

Questions to consider

Deciding whether to convert to a Roth IRA depends on things like your tax rate now vs what it would be later and the tax bill you may need to pay to convert.

Nobody knows how tax rates will change over the next 10, 20 or 30 years.

If you believe your tax rate is lower now than it will be when you start taking money out, a conversion may be a great idea because you will be paying taxes while you are in a lower tax bracket and then have tax-free money available in retirement.

If your income tax bracket is higher now than when you start taking withdrawals a conversion may cost you more in taxes now than you would save by having tax free withdrawals later.

If you would like to discuss this further, please let us know.  Also, please consult with your tax advisor so you will understand the tax liability for your specific situation.