ROTH Conversions
A Roth IRA can offer more advantages than a traditional IRA for some savers. Contributions are made with after-tax dollars, allowing the money to grow tax-free. Withdrawals are also tax-free after 59 ½ and after owning your account for at least 5 years. Additionally, there are no required minimum distributions, allowing you to grow your savings and pass them on tax-free to your beneficiaries.
Our Philosophy & Approach to Roth IRA Conversions
1. We analyze the benefits of a Roth IRA conversion in light of your overall savings profile and tax situation
Oftentimes, if you have too much money in tax-deferred accounts and little or nothing in taxable and tax-free options, doing a Roth IRA conversion can help rebalance your retirement savings profile and allow you to enjoy more spendable retirement income.
2. We consider your lifetime tax obligation, not just your annual tax bill
Your retirement may last for decades, which is why we stress the importance of your lifetime tax obligation. In terms of a Roth conversion, it’s important to decide whether paying higher annual taxes temporarily outweighs paying higher taxes over your lifetime.
3. We encourage you to take action now, before tax rates increase
Tax rates and brackets aren’t static for long. If a Roth conversion is in your future, it may be in your best interest to act now before taxes change, required minimum distributions begin, and wealth transfer occurs.
Income restrictions can limit who is able to open a Roth IRA, and if you do meet the requirements, the annual contribution limits can be disappointingly low. The maximum annual contribution you can make to all your IRAs is $7,000 per year if you’re younger than 50, and $8,000 for age 50 and over.
Fortunately, you can avoid these drawbacks by moving a portion of your tax-deferred savings from a traditional IRA or an employer-sponsored plan like a 401(k) into a Roth IRA. There are no income restrictions or annual caps. While you’ll face a one-time tax bill in the year of the conversion, your account can grow tax-free from then on with no required minimum distributions. This can help preserve your money for longer and transfer it tax-free to your beneficiaries, while also potentially reducing your taxable estate.
Moving a large sum of tax-deferred dollars all at once can push you into a higher tax bracket, but you can avoid this by converting smaller amounts annually, therefore spreading the tax obligation over several years.
How We Can Help You With a Roth IRA Conversion
At Freedom First Retirement Design, we specialize in Roth IRA conversions for pre-retirees and retirees. We can assess whether a conversion is in your best interest and advise on the optimal amount and timeframe. Our sound advice can help you avoid withdrawal penalties, a higher income tax bracket, ineligibility for certain tax deductions and credits, increased capital gains taxes, increased taxation of Social Security income, and higher Medicare premiums.
We’ll recommend appropriate investments that align with your financial objectives, risk tolerance, and time horizon. We’ll also help you navigate the process and paperwork associated with the Roth conversion.
