Make Life a Little Easier for Yourself; Revisit the Roth this Summer

By Elsie Dudukovich0 Comments

On paper, a conversion is just what it sounds like: you’re converting money from one tax environment to another.  In this case, it’s the pre-tax environments of the Traditional IRA, SEP IRA, or SIMPLE IRA to the post-tax environment of the Roth IRA.   
Here are some things to get you started thinking about a Roth conversion. 
  • You should expect a conversion to be a taxable event, but it’s not as black and white as it may seem.  There are a number of factors when it comes to determining your tax liability.  For example, in addition to the amount of funds you convert, your tax liability for a conversion also depends on the nature of your contributions; non-deductible contributions or deductible contributions.  A tax advisor can help you discover your options.
  •  Converting earlier in the tax year may be beneficial compared to converting later in the yearas taxes may not be due until you file.
  • If you previously did not qualify for a Roth, remember due to changes in the tax code in 2010, the MAGI limits and tax filing status rules no longer apply to conversions.  Roth conversions also do not fall under the new one rollover per year rule in effect beginning in 2015.  If you are thinking about converting Traditional funds to your Roth IRA, you need to explore your options once Required Minimum Distribution (RMD) calculations start.  When it comes to Traditional IRAs and the need to complete an RMD, you should consider completing your RMD prior to converting funds to a Roth IRA.  The RMD amount cannot be converted. Again, this is something you will want to have time to review with care and guidance with your tax advisor.  
  • When it comes to distributions, the Roth’s 5 Year Rule starts on January 1 of the year you convert, no matter the date you convert during the year.  Converting now means you’ve gained time toward the 5 Year obligation.
  • As with all things, take a look at how the numbers play out.  You can complete multiple conversions over time to lessen the tax obligation in a way that works best for you.  You may also find benefit in converting all at once. You may convert any amount you wish and can also convert non-traditional assets.
Diversify your tax obligations by saving in accounts with different tax environments. This gives you another element of flexibility in controlling your retirement tax bills and making the most of your IRA funds.  This flexibility comes with a number of aspects you need to take into consideration and navigating these waters under the guidance of a qualified tax advisor may be in your best interest. 
Give yourself the time you need to make the best decision for your retirement goals by taking a look at converting now – not while you’re juggling a hectic personal and professional schedule at the end of the year.

Contact us to discuss Roth IRAs and conversions.