Roth Conversions: Is It Right for You?
Traditional IRA’s are one of the most popular investment accounts when planning for retirement. Like a 401K, traditional IRA’s use pre-taxed dollars to fund the account. The advantage of this is that by using pretax dollars you effectively lower your taxable income. It’s important to note, when it comes time for distributions, you are taxed at your current income level.
If you think your retirement tax bracket may be higher than anticipated and you would like to lock in a tax rate now, you might want to consider a conversion. A conversion is where you turn a traditional IRA into a Roth IRA. However, there are some considerations.
The key difference between a Roth and traditional IRA is that a Roth IRA uses post-tax dollars. This means you can withdraw your principal balance at any time, tax-free. Additionally, any distributions you take in retirement are distributed tax-free as well. Unlike a traditional IRA, you are not required to take distributions from a Roth account.
In an effort to ease the financial burden the pandemic caused, the government passed the CARES Act. This allowed individuals to withdraw, penalty free, from their retirement accounts.
If you are considering a conversion, here are some things to consider:
- If you are over the age of 59 ½ a conversion will most likely not benefit you- unless you qualify for the CARES Act.
- If you are younger than 59 ½ and are in a lower tax bracket it could be beneficial (because once you convert, you will owe taxes at your current rate.)
According to the IRS, “A coronavirus- related distribution is not subject to the 10% additional tax that otherwise generally applies to distributions made before an individual reaches age 59 ½. In addition, coronavirus- related distributions can be included in income in equal installments over a three-year period, and an individual has three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution.”
For individuals who have been minimally impacted by COVID, this may be a great opportunity to lock in your current tax rate. By converting to a Roth, you effectively lock in a lower tax rate now, therefore as you grow your income and move up in bracket you will not have to worry.
Retirement accounts, in addition to benefiting the individual, often benefit beneficiaries as well. If you have a traditional IRA, your beneficiaries will likely have to pay tax on what’s left over. If you choose to convert your account to a Roth IRA, you can pass on your balance with no tax implications.
Everyone is different and so are their retirement objectives. Partners Wealth Management can help you sort it all out and determine what is right for you to ensure your money is working as efficiently as possible. Contact us at info@partnerswealth.com or 630.778.8088.
About the Author: John E. Freiburger is the Managing Partner at Partners Wealth Management in Naperville, IL. John is also the co-author of a book entitled Strictly Business: Planning Strategies for Privately Owned Businesses. He frequently hosts educational seminars and speaks to a variety of groups on a national level on topics ranging from asset protection to wealth transfer and investment management to financial independence.
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“Converting a traditional IRA to a Roth IRA is a taxable event and could result in additional impacts to your personal tax situation, including the taxation of current social security benefit payments. Be sure to consult with a qualified tax advisor before making any decisions regarding their IRA.”
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA-SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Partners Wealth Management is a member firm of PartnersFinancial. Kestra IS and Kestra AS are not affiliated with Partners Wealth Management or PartnersFinancial.
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