To Convert or NOT To Convert in 5 Easy Steps

Kevin Wray Income Planning, Insight Investing Articles, Investing, Investing & Planning, Retirement, Retirement Planning

What is a Roth Conversion?

A Roth conversion is the process of moving IRA or employer plan assets to a Roth IRA.

How Do I Decide if I Should Convert to a Roth?

Below are some thoughts regarding that question:

  1. When will you need the money? If you have an immediate need for the funds or need them to maintain your current standard of living, then a Roth conversion is probably not for you. However, if you have no immediate need for the funds, a Roth conversion is potentially a great way for the funds to grow tax-free over your lifetime. This should be thought of as crock pot money. You will want to let this money sit and stew and grow over time so you can benefit from the tax-free status. With today’s low tax rate environment, it is a great time to look into whether converting is right for you because converting to a Roth does have tax consequences.
  2. Where will the money come from to pay the tax? Most of the time it will make sense to take the money to pay the tax on a Roth conversion from outside (non-retirement account) funds. Converting to a Roth will trigger a taxable event: meaning you will owe tax. Remember the longer you defer your IRA the more it grows and the bigger your tax will be. Uncle Sam will become a bigger partner in your IRA.
  3. What do you think future tax rates will be?  Today we are in the second lowest tax environment in recent history. According to Wikipedia, when FDR was president the highest tax rates were above 90%. JFK lowered them to 60% and Ronald Reagan lowered them further to 38.5%. If you think that taxes will go up in the future, then today is the time to start looking into a Roth conversion.
  4. Other reasons TO consider a Roth conversion. You may have large tax deductions such a charitable deduction. You also may have losses from previous investments, and you can use the loss to offset some of the tax due. You don’t have to take an RMD at age 70 ½ when you own a Roth; and this alone could save you thousands in taxes down the road. And when you leave this world, whatever is in your Roth will go income-tax-free to your heirs.
  5. Other reasons to NOT consider a Roth conversion. You hate paying taxes up front. Like a lot of people, you just don’t trust the government to keep their tax-free deal. If you are a charitable person and want to leave your account to a charity, the charity will not have to pay income taxes on the money. In that case you wouldn’t want to convert. If you have questions on whether to convert or not just give us a call and we will be more than happy to sit down and see how a Roth fits into your plan.