Roth IRA Conversions

When Do Conversions to Roth IRA Make Sense?

Tax brackets and time until retirement are the most important considerations when deciding if a Roth conversion is right for you.

With individual tax brackets shrinking, you may foresee shifting into a higher tax bracket after retirement. By making a Roth conversion you will pay taxes on the converted amount during the year you make the conversion, and you won't pay any taxes when you're ready to withdraw the funds from your Roth IRA while in retirement. Though it can be burdensome to pay taxes upfront, it can mean significant savings later.

If you decide to convert assets into to a Roth IRA, the money must stay in that account for a minimum of five years. Withdrawing early (regardless of age) will result in a 10% penalty and additional income taxes. That means for an Roth IRA conversion to be beneficial, you must have adequate time available before retirement.

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What Are IRA to Roth Conversions?

What Are IRA to Roth Conversions?

A Roth conversion, simply put, is moving assets from a qualifying retirement plan into a Roth IRA. There are a couple of ways to accomplish this. One is by rolling over assets from the previous IRA directly into a Roth IRA via a financial institution. The other option is that the IRA owner can withdraw and distribute assets from their current plan into the Roth IRA themselves, so long as they do so within 60 days of receiving the distribution. Regardless of which option you choose, the process is heavily regulated due to the significant tax implications. All conversions should be overseen by a financial advisor.

Frequently Asked Questions

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

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