Today, we will discuss Roth IRA conversions and why you may want to at least consider this move as part of your overall financial plan. We will discuss some basic terminology, rules, and also some misconceptions. In particular, we will discuss why you may want to consider this move today.
WHAT IS A ROTH IRA CONVERSION?
- A Roth conversion is simply taking money from a traditional tax-deferred IRA and moving it to a Roth IRA. This is a taxable event and will create ordinary income upon the conversion, to be reported on your 2022 income tax return, next spring.
- Going forward, with proper planning, the converted dollars sit in a Roth IRA account that will be tax-free in the future for both you and your beneficiaries.
- In addition, under current tax law, the money will not be required to be distributed during your life. This is different than a traditional tax-deferred IRA that forces taxpayers to start taking distributions as ordinary income at age 72, regardless of whether they actually need the funds.
WHY WOULD I CONSIDER DOING THIS NOW?
- Several factors point to this year being a good year to consider a Roth conversion.
- First, we have relatively low tax rate brackets yet for most taxpayers (e.g. 24% bracket for MFJ up to taxable income of $340k). No one knows what the politicians in Washington will do, but we do know that tax rates will increase on their own after 2025.
- Lower tax rates now translate to a lower cost for converting.
- Second, as most people know too well, the stock market has been hit very hard this year and values overall are down. The amount of income recognized on a Roth conversion is based on the value at the date of conversion, NOT the future value of the account.
- If you expect future values to rebound, you can convert at a lower cost now.
CAN I CHANGE MY MIND AFTERWARDS?
- This is an important point that needs clarification.
- In prior years, a taxpayer could characterize a Roth IRA conversion, in full or in part and for any reason whatsoever.
- This ‘do over’ option, though, was eliminated as part of the 2017 tax cuts and jobs act.
- Thus, careful attention should be given before any Roth conversion to fully understand the costs and benefits.
- As with any transaction, we recommend consulting your financial and tax advisors ahead of time to model what this could look like in your specific financial situation.
Be sure to talk to a tax professional if you have any questions about Roth IRA Conversions.
I joined Hawkins Ash CPAs as a Partner in 2021. With over 20 years of professional experience with regional, national, and global public accounting firms, I utilize a unique blend of accounting, tax, and legal expertise to provide tax and transactional planning to business owners, individuals, and families.
