Some people get a dormitory named after them. Others get a park. Some get a street. Regardless, getting something named after you is an honor; a legacy. The Roth family hit a home run with their legacy. Senator Bill Roth Jr. was the sponsor of legislation that created the Roth IRA. He left a legacy of opportunity. But to some, he left a legacy of confusion.
Let’s remove a few degrees of confusion and unpack five considerations before you convert your traditional or rollover IRA to a Roth IRA.
1. You must have cash above and beyond your emergency fund.
You can’t pay the taxes owed on a Roth IRA conversion from your IRA. That would be considered a pre-mature distribution. The cash needed to pay the tax would need to come from your cash reserves.
2. You should look at your tax bracket.
If you have $100,000 income, you could consider converting $51,900 of your traditional IRA before you went into the 28% bracket. The idea of converting up to your next bracket may be the most strategic approach to conversion.
3. You may need the income between 59-½ and 65.
The Roth IRA allows withdraws to come out tax free (if you follow the rules). Thus, taking tax-free distributions between 59-½ and 65 could put you in a very low tax bracket. Being in a low tax bracket is very advantageous for health insurance subsidies.
4. You want to pay the taxes for your kids.
You just love them so much that you want to give them a Christmas gift of taxes. If your kids are in an extremely high tax bracket and you have the cash, it could be an extremely valuable inheritance and one the government would not like.
5. You must pay attention to after-tax contributions.
If you think that converting after-tax contributions to a Roth is easy, think again. Conversations about after-tax contributions are complex and could create a much bigger tax bill than you ever considered. This is just a warning. Unfortunately, it’s too much for a blog post to dive into.
I do appreciate Senator Roth and the new vehicle he manufactured. I’m certain he would be proud of the usage of the Roth IRA and would even like to expand it further. As of today, let’s just make the most of it!
One other important disclosure: Please talk with your tax professional before conversion. This information is for a general audience. Your specific situation may not apply.
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 five 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.
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 material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.
