End-of-Year Money Maintenance that Could Pay Off

By Equity Trust Staff0 Comments

The last months of the year are months of planning, introspection, and celebration.  In the midst of putting holiday plans in order, set aside the time to take stock of your retirement goals and what actions will lead you to realizing them.  This time of the year will still give you enough time for decisions governed by the end of the calendar year deadline, such as Roth conversions, as well as time to set the stage for choices driven by the 2014 tax filing deadline and long other longer term objectives for 2015.

As with any significant financial matter, you might find it in your best interest to sit down with a qualified professional to discuss the specifics of your situation.  Check out this list to get you started on points to take stock of your current state is and what direction is best for you.

A key point to take notice of now is the option to do a 2014 Roth conversion.  Many people choose to convert their accounts at this time of year because it’s a great way to have a Roth IRA, even if your income or filing status excluded you from opening one initially.  With current tax rates as low as they are now, being able to fund an account with post-tax funds can save you from having to pay possibly higher taxes when you take your Traditional IRA distributions.

Even better, while you fund your new Roth IRA with a conversion and subsequent contributions, you are building an emergency fund.  The Roth IRA’s 5-year rule means you do have to leave your contributions and converted amounts in the account for 5 years, but after that you can take those funds tax and penalty free.  If find  yourself in a position where an emergency fund will save the day, you can take those funds out of the account, while leaving the earnings to continue growing.   

Contrary to what some believe, you are free to decide how much of your Traditional IRA you want to convert. Yes, there will be taxes on the converted assets because you are changing from the pre-tax Traditional environment to the post-tax Roth environment.  The earnings on those converted assets will be tax-free at the time of a qualified distribution, as is the nature of a Roth IRA. 
 
As a conversion is a taxable event, this aspect can make the guidance of a tax professional particularly beneficial. 

As an Equity Trust client, at this time of year you need to put your decision to do a Roth conversion in motion well before the December 31 IRS deadline. Visit this website to learn more about the Roth IRA and what you need to make your conversion happen.