ROTH Conversions

For some people, a Roth IRA offers more advantages for retirement savings than a traditional IRA. Contributions to a Roth don’t provide immediate tax deductions; instead, you contribute after-tax dollars, and the money compounds on a tax-free basis. Withdrawals are tax-free as well, as long as you’re 59 1/2 and have owned the account for at least 5 years. There are no required minimum distributions, so you can keep this money growing throughout retirement and pass it on tax-free to your beneficiaries.

Not everyone who’s interested in a Roth IRA can open one due to income restrictions. If you do meet the requirements, the annual contribution limits can be disappointingly low. The maximum annual contribution you can make to all your IRAs is $6,000 per year if you’re younger than 50, and $7,000 for age 50 plus.

However, there is a way to get around these drawbacks by doing a Roth IRA conversion (or back-door Roth IRA) where you move a portion of the tax-deferred savings you’ve accumulated in a traditional IRA or an employer-sponsored plan like a 401(k). No income restrictions apply and there’s no annual cap on the amount of savings you convert. You’ll face a one-time tax bill in the year you make the conversion, but your account can grow tax-free from that point on. There are no required minimum distributions to contend with, so you can preserve this money as long as you’d like and transfer it tax-free to your beneficiaries. A conversion can also reduce the size of your taxable estate, helping to preserve more of your wealth.

Moving a large sum of tax-deferred dollars all at once can push you into a higher tax bracket, but you can avoid this by moving money in stages. By making one conversion annually, you can spread the resulting tax obligation over several years.

How We Can Help You With a Roth IRA Conversion

After working with pre-retirees and retirees on a daily basis, Johnson Brunetti has learned all the ins and outs of Roth IRA conversions. We can assess whether a conversion is in your best interest, and if so, advise you on the amount to convert and the timeframe. Our sound advice can help you avoid unwelcome consequences: withdrawal penalties, a higher income tax bracket, ineligibility for certain tax deductions and credits, increased capital gains taxes, more taxation of Social Security income, and higher Medicare premiums.

We’ll recommend appropriate investments from the myriad of options available, making sure they’re an appropriate match for your financial objectives, risk tolerance, and time horizon. And we’ll also help you navigate the process and paperwork associated with the Roth conversion.

You can turn to us for answers to your most important questions:

  • Am I a good candidate for a Roth conversion? Why or why not?

  • If yes, is now a good time, or should I wait?

  • How much money would you recommend I convert?

  • What impact will this have on my tax bracket?

  • What are my investment choices? Are they different from those I’m familiar with?

  • Which of the available investment options are suitable for me?

  • Are there any restrictions on withdrawing money?

  • Can I name beneficiaries? Will they have to pay taxes on the account?

  • Can you help me make this conversion or am I on my own?

  • Should I contribute to different types of IRAs?

Our Philosophy & Approach to Roth IRA conversions

1. We analyze the benefits of Roth IRA conversion in light of your overall savings profile and tax situation

Your retirement savings profile may be imbalanced, with too much money in tax-deferred accounts and little or nothing in taxable and tax-free options. Doing a Roth IRA conversion is often the simplest and most efficient way to regain proper balance and enjoy more spendable income in retirement.

2. We consider your lifetime tax obligation, not just your annual tax bill

Your retirement may last for decades, which is why we stress the importance of your lifetime tax obligation. In terms of a Roth Conversion, it’s important to decide whether paying higher annual taxes temporarily outweighs paying higher taxes over your lifetime.

3. We encourage you to take action now, before tax rates increase

Tax rates and brackets aren’t static for long. We see a window of opportunity for tax planning right now, before provisions of the 2017 act sunset in 2025. If a Roth conversion is in your future, it may be in your best interest to act now before taxes change, required minimum distributions begin, and wealth transfer occurs.

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