- September 15, 2022
- Posted by: Keri Pugh
- Categories: Financial Goals, Investment
A Roth IRA conversion involves repositioning traditional IRA or qualified employer-sponsored retirement plan assets into a Roth IRA. One reason people convert traditional IRAs or other retirement accounts into Roth IRAs is so they can enjoy tax-free income in retirement. Another reason is the Roth IRA’s flexibility not to make withdrawals if the money isn’t needed since there is no Required Minimum Distribution (RMD). Or, they may use a Roth IRA conversion as part of estate planning to lessen the impact of estate taxes on their estate.
Whatever the reason for the Roth IRA conversion, investors often consider this a suitable time to do a Roth IRA conversion whenever the stock market is down. However, there are many questions to answer before putting this strategy into action:
Does your qualified retirement plan allow Roth IRA conversions?
If you have your monies inside your employer’s retirement savings plan, check the plan’s documents to see if a Roth IRA conversion is allowed. If not allowed and you initiate the conversion, the conversion may not occur, or a penalty will be applied when the conversion happens. Consult your employee handbook, contact your HR, or contact your employer-sponsored retirement plan’s custodian for answers about your situation.
Can you pay the taxes?
Since traditional IRAs and other qualified retirement plans are tax-deferred plans, upon converting assets into a Roth IRA, the account owner must pay income tax on the amount they convert. Also, the taxes are due upfront when the conversion occurs.
Are you comfortable with your Adjusted Gross Income (AGI) increasing?
A Roth IRA conversion will increase your income in the year that the conversion occurs. If you are retired, be mindful that Medicare Part B uses your two previous years’ income to calculate your monthly premium, and the conversion may increase your Part B payment for at least two years.
Increasing your AGI also may impact your income tax as you may move into another income tax bracket. Meet with your financial and tax professionals to determine how a Roth IRA conversion may affect you.
Will you lose eligibility for specific tax write-offs?
The child tax credit and student loan interest deduction are determined by personal income, and initiating a Roth IRA conversion may mean you lose these deductions if your AGI increases.
Will you need the money within five years?
Roth IRAs typically offer penalty and tax-free withdraws anytime on contributions. Still, when using conversion monies, investors must wait five years to withdraw the funds without a 10% penalty regardless of their age. If you anticipate needing money from your Roth IRA before the five-year rule sunsets, this may not be an appropriate strategy for you.
Talk to a financial professional.
Your financial professional can help you determine if a Roth IRA conversion is appropriate for your situation by helping you weigh the pros and cons. Contact them today!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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Keri Pugh is a Wealth Advisor with Fusion Financial Group, an independent financial planning firm and fiduciary based in Denver, CO. Keri has over 20 years of experience in the industry, as both a financial advisor and Principal. She obtained a bachelor’s degree in Finance from the University of Northern Colorado and is an alumna with national sorority Delta Zeta. Keri holds a variety professional licenses, carries the esteemed mark of Certified Financial Planner (CFP®), meeting rigorous education and experience requirements in key areas of financial planning, as well as the designation of Accredited Investment Fiduciary (AIF®), a symbol of her dedication to upholding the fiduciary standard for clients. As a wife and mother to two young children, Keri is particularly drawn to working with thriving families and women. This is not only reflected within her practice but also in her regular sponsorship of the local PTA and volunteer work with the elementary school. Outside of the office, Keri enjoys traveling, skiing, and the Colorado great outdoors with her family. She often lines up movie marathons for the family and, in line with many clients, is a beginner golfer and a wine enthusiast. To learn more about Keri, connect with her on LinkedIn.