Posts Taged iras

Ask Deborah: Should I Convert my IRA to a Roth IRA?

Creating a retirement strategy is an important factor in planning for your ideal financial future. Whether you’re at the first steps and are trying to identify your options or are up for a review of existing accounts, you have plenty of decisions to make.

Today we’re talking to our very own Deborah Williams, CFP to learn more about a popular retirement topic: should I convert my IRA to a Roth IRA? She’ll answer some questions you may have about who is a suitable candidate for a conversion and what benefits such a decision allows.

If you have retirement accounts and are considering an IRA conversion, grab a cup of coffee and stay a couple of minutes as we explore the details of this option for your retirement strategy!

Identifying A Suitable Candidate for a Roth IRA Conversion

Before you determine whether to make the switch from an IRA to a Roth IRA, you want to identify whether this is an appropriate move for you as an individual. While everyone is unique and your retirement needs may likely differ from those of your neighbors or coworkers, there are some general categories of investors for whom an IRA conversion makes sense.

Younger investors, for example, can generally benefit from a conversion to Roth IRA, since they have the time to let the investment account compound and grow. If you’re not going to be dipping into your retirement funds for a few decades yet, you may want to consider making the switch.

Since Roth IRA accounts offer tax savings on distributions and withdrawals, it may be beneficial for those who are in a lower tax bracket currently and anticipate that they will be in a higher tax bracket during retirement to make a conversion. This way, they will pay less tax on the conversion due to their current bracket but enjoy the break later on when they are taking distributions and are in a higher bracket.

Roth IRAs can also be a strategy for investors who are approaching retirement age and want to avoid having to take their required minimum distribution that is mandated at age 70 1/2. In fact, if you plan to sit on your IRA funds and prefer not to use them extensively during your retirement, these accounts are ideal for passing onto your heirs tax-free.

Tax Considerations of Converting to a Roth IRA

For many, the switch from a Traditional IRA to a Roth IRA is motivated by the tax benefits of making such a move. Unlike the IRA there is no tax credit for contributions to a Roth and the value of the account at the time of conversion to a Roth would be added to taxable income for that year. So if your IRA is down in value due to a market loss it may be a good time to consider converting. But if you aren’t able or willing to make the federal and state tax payments that will be attributed to the switch then conversion will not be right for you.

Roth IRA conversions can also offer very specific tax benefits for business owners who are recording a net-operating business loss. Under certain situations, they can use the value of their loss to offset the additional taxable income created by the Roth IRA conversion. With proper planning and consultation with the CPA even an unfortunate business loss may benefit the owner’s long term retirement plan. 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.

Your Retirement Savings Options

Deciding whether to convert to a Roth IRA is a personal decision that requires careful consideration. If you’d like to learn more about your IRA options or start planning for your retirement, feel free to contact Deborah at Puckett & Sturgill Financial Group for a discovery meeting.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Should You Convert to a Roth IRA

Should You Convert to a Roth IRA

Individual retirement accounts (IRAs) come in two flavors: traditional and Roth. With a traditional, contributions are potentially tax deductible and taxes on contributions and earnings are paid when funds are withdrawn in retirement. With a Roth, contributions are made after tax, but withdrawals in retirement are generally tax free.

But even if you have been contributing to a traditional IRA, you are allowed to convert it to a Roth IRA, which may or may not work to your benefit. Before considering a Roth IRA conversion, however, it is important to understand that each type of IRA has its own rules summarized in the table below.

Traditional Versus Roth: Understand the Differences

Maximum Annual Contribution

Traditional IRA

$6,000 for single taxpayers and $12,000 for couples filing jointly for 2019. An additional $1,000 “catch up” contribution is permitted for each investor aged 50 and older who has already made the maximum annual contribution.

Roth IRA

Same as traditional IRA.

Income Thresholds for Annual Contributions

Traditional IRA

None, as long as the account holder has taxable compensation and is younger than age 70½ by the end of the year.

Roth IRA

Single taxpayers with modified adjusted gross income (MAGI) of $137,000 or more and married couples filing jointly with MAGI of $203,000 or more are not eligible to contribute in 2019. Income thresholds are indexed annually.

Deductibility of Contribution

Traditional IRA

Yes, if account holder meets IRS requirements (income restrictions apply if account holder or spouse is covered by a retirement plan at work).

Roth IRA

Contributions are not deductible.

Contributions After Age 70½

Traditional IRA

Not allowed.

Roth IRA

Permitted if owner has earned income.

Required Minimum Distributions (RMDs) After Age 70½

Traditional IRA

RMDs are required.

Roth IRA

Not required during original account holder’s lifetime.

Taxes on Distributions

Traditional IRA

Distributions are taxed as ordinary income. Withdrawals before age 59½ may also be subject to a 10% penalty.1

Roth IRA

Qualified distributions are tax free. Withdrawals from accounts held less than five years or before age 59½ may be subject to taxes and a 10% penalty.

Tax Implications

The good news is that converting a traditional IRA to a Roth IRA will not trigger the 10% penalty that early withdrawals from an IRA usually do. But converting will trigger income taxes on investment earnings and contributions that qualified for a tax deduction. If your traditional IRA contributions did not qualify for a tax deduction because your income was not within the parameters established by the IRS, investment earnings will be taxed but the amount of your contributions will not.

When a Conversion May Be Beneficial

Conversion may be advantageous if you are in one of the following situations:

  • You do not plan to access your IRA assets for a long time, and your account will have time to potentially grow and compound before you begin withdrawals.
  • You are not likely to need the Roth IRA assets for living expenses during retirement. Because you wouldn’t have to take RMDs from your Roth IRA, you could leave these assets intact and potentially bequeath a larger sum to heirs.

When a Conversion May Not Be Beneficial

A Roth IRA conversion may not be in your best interest if the following circumstances apply:

  • You anticipate being in a lower tax bracket during retirement. Sticking with a traditional IRA could be the best option because your RMDs would be taxed at a correspondingly lower rate.
  • You plan to retire in the near future. Should you convert, your Roth IRA may not achieve adequate short-term growth prior to withdrawals to compensate for the tax payment.
  • You plan to access the IRA for living expenses, and a bequest to heirs is not an issue.

Converting assets within a traditional IRA to a Roth IRA presents potential benefits, but only if the time horizon, tax issues and estate planning parameters work to your advantage. Review all angles to make sure you make the right choice.


Footnotes and Disclaimers

1IRA account holders (both traditional and Roth) may make penalty-free withdrawals before age 59½ only if they meet specific criteria established by the IRS such as disability, first-time home purchase and others. Consult www.irs.gov for additional information.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2019 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

For Public Use: Tracking # 1-835916 (Exp:4/2020)