Saving for Retirement and Saving on Taxes - The Ins and Outs of a Roth Conversion

Saving for Retirement and Saving on Taxes - The Ins and Outs of a Roth Conversion

| March 05, 2019

Since its introduction in 1974, the Individual Retirement Account (IRA), has been a powerful vehicle for long-term savers. The IRA has undergone a number of changes and iterations over the years, but the basic concept remained unchanged. Those saving for retirement got an up-front tax deduction, but the money they withdrew in retirement would be subject to ordinary income taxes.

In 1997, the traditional IRA concept was turned on its head with the introduction of the new Roth IRA. Like the traditional IRA, the Roth was designed as a retirement savings vehicle, but the rules were reversed. Check out our article "9 Facts About Retirement."

Instead of the up-front tax deduction, those contributing to a Roth IRA would enjoy tax-free withdrawals in retirement. That made the Roth IRA a popular choice for younger workers and for those who expected tax rates to rise in the coming years.

What is a Roth Conversion?

Given the 23-year gap between the introduction of the original IRA and its Roth incarnation, it is no surprise that many account holders who could have benefited from tax-free withdrawals find themselves wondering if their current account type was really the right choice.

As the name implies, a Roth conversion converts some or all of a traditional IRA to a Roth IRA. While individuals must pay ordinary income taxes on the amount converted, the smart tax move could be a great deal in the long run. Younger individuals will have decades to grow their assets tax free while high net worth individuals can reduce the taxable portion of their investments potentially lowering their current and future tax bracket.

Should I Do a Roth Conversion?

A Roth conversion can be a smart move, both from a tax standpoint and for overall retirement savings. However, there are several factors to consider. Here are some key things to think about before doing a Roth conversion.

  • Can I pay the taxes without tapping my retirement funds or long-term savings?
  • What is my current tax rate?
  • How much of my IRA account can I convert before entering a higher tax bracket?
  • Do I expect tax rates to rise or fall in the future?
  • How does the proposed Roth IRA conversion fit into my estate plan?

There is no one right move for everyone and it is important to weigh the pros and cons carefully when contemplating a Roth IRA conversion.

Roth IRA Conversion Rules

Since the $100,000 income cap has been removed, there really aren’t any rules to qualify. It comes down to a simple evaluation to determine if you will benefit from paying the taxes now and allowing the future growth to be tax free.

The deadline for completing a Roth conversion is December 31st. Keep in mind, to avoid the 10% penalty you must move the funds from the Traditional IRA to the Roth IRA within a 60-day window.

When is the Best Time to Do a Roth IRA Conversion?

Everyone's situation is different and there is no perfect time to complete a Roth IRA conversion. However, thanks to the recently enacted tax reform act, marginal tax rates are now at their lowest level in decades. So, investors who convert their traditional IRAs to a Roth in 2019 will still be able to take advantage of those new lower tax rates on the income that is triggered. That could make the conversion much more affordable.

Bottom line is this, if you can benefit by paying the taxes now and getting tax free growth for the rest of your life, you might want to consider making the conversion. On the other hand, if you need to raise cash to pay the taxes due, you may have no choice but to wait. Consult your tax professional to assist you in completing your evaluation and to help determine if a Roth conversion is the right choice for you.

If you have questions about your retirement account, IRA, conversion or other financial services, CPK Wealth Management is here to help. We provide transparent business solutions and always act in the best interest of our clients. Call us today, 239-230-2177, to see how we can help with your Roth conversion or other financial planning needs.



CPK Wealth Management LLC is a Registered Investment Advisor ("RIA") located in the Fort Myers, Florida.