How Might A Roth IRA Conversion Benefit Me?

What is a Roth IRA Conversion?  What is a Roth IRA?  A little background.  The main difference between a Traditional IRA and Roth IRA is when you pay taxes on the money.  In a Roth IRA, contributions are funded with after-tax dollars and qualified withdrawals from a Roth account are tax free (under the conditions that the account has existed 5 or more years and that the owner is at least 59 and a half years of age).  In a Traditional IRA your earnings grow tax deferred and your withdrawals are taxed as ordinary income.

Roth IRA accounts were started with the passing of the Tax Relief Act of 1997¹ which is one of the largest tax-reduction acts in U.S. History.  The legislation also introduced the Child Tax Credit and provides tax relief for education savings.  Since the Roth IRA conversion event of 2010 there are conversion rules which apply for transferring a Traditional IRA or 401 (k) to a Roth IRA².  Depending on your situation there are potential long-term benefits from converting the (Traditional) tax-deferred retirement account to a (Roth) tax-free retirement account.

The main ways to get money into a Roth:

1. Contribute. This is pretty self explanatory, contribute earned income into the account by the tax deadline of April 17, 2018.  ‘If you are single, you must have a modified adjusted gross income under $133,000 to contribute to a Roth IRA for the 2017 tax year, but contributions are reduced starting at $118,000. If you are married filing jointly, your MAGI must be less than $196,000, with reductions beginning at $186,000.’  Contributions are limited to $5,500 if you are under 50 and $6,500 if you are over.³ 
2. Convert. Like mentioned earlier, this is when you would need to speak with a financial institution or CPA to explore your options. Converting to a Roth could be a smart move, just remember that time is of the essence and to do your research.

If converting is something you are considering, speak with the financial institution and ask them on their process for transferring from a Traditional to a Roth is the best way to get the ball rolling, or if you decide it is time to move to a completely different institution, start researching different places to find the right fit. Some people do decide to rollover by themselves, which can be a bit on the riskier side.  There are several rules to converting including moving the funds in a 60 day window and the amount transferred to a Roth IRA will be added to your earned income and taxed at your current rate⁴. 

Reasons a Roth IRA Conversion could benefit you⁵:

1. If you won’t be needing the Required Minimum Distributions from your IRA at 70 1/2.
2. You’re moving to a higher tax state or your tax rate is increasing.
3. You don’t expect to be needing your IRA money for retirement income.
4. The investments of your IRA are down or flat.
5. Special tax circumstances, net operating loss or charitable deduction carry forwards.
6. Loss of a spouse (joint tax brackets are more favorable than single).
7. Your Social Security might be taxed.

Although there can be skeptical views of converting to a Roth, it can help to provide you with tax-free income in retirement.  Get sound advice from a financial adviser or CPA before making the decision to convert.

If you are interested in setting up a Roth account or reviewing your account for a conversion, contact us at The Resource Center anytime at 417-882-1800.

Sources:

1- http://www.getrichslowly.org/2011/09/15/eight-little-known-facts-about-the-roth-ira/

2- https://www.goodfinancialcents.com/7-things-to-know-about-roth-ira-rules-for-2010/

3- https://www.rothira.com/roth-ira-limits

4- https://www.investopedia.com/articles/personal-finance/040815/converting-traditional-ira-savings-roth-ira.asp

5- https://www.forbes.com/2010/03/09/roth-ira-conversion-tax-retirement-personal-finance-10-reasons-convert_slide/#6182fcba4245

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We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives.  This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice.  All investments are subject to risk including the potential loss of principal.  No investment strategy can guarantee a profit or protect against loss in periods of declining values.  

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.  

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