Roth Conversions: Why You Might Consider Converting to a Roth IRA

May 25, 2022

Roth conversions is a process of converting savings from a tax-deferred retirement account like IRA or 401(k) accounts to a Roth IRA. Roth conversions can be advantageous because the money you contributed can grow tax-free, and all distributions can be taken out completely free of taxes if you are older than 59.5 years old and the account has been open for at least 5 years. With potential tax law changes on the horizon in the coming years and the tax implications they have for retirement accounts for many people, the idea of converting money from a tax-deferred account to a Roth IRA account to potentially lower tax liabilities can be appealing to some. Roth conversions potentially saves people money on taxes if they are in a lower tax bracket currently (and pay those taxes) than they might be in the future (and would, therefore, owe more taxes) if tax rates were higher. There are restrictions on Roth IRAs in terms of mandatory a 5-year holding period and penalties if the assets are used prior to the period expiring as well. This blog post discusses why you might consider doing this type of conversion, who should consider it, and the benefits and disadvantages that come with it.


Advantages of Roth Conversions

Converting to a Roth IRA can help when you feel that future tax law changes can place you in a position where you might be paying more taxes in the future than you are now. Where do you think taxes will be in the future? Do you think taxes will go up? Or down? If you believe your tax liabilities today are lower than they will be in the future, you may want to consider a conversion. After a conversion of tax-deferred money to a Roth IRA account, the contributions come out of the account completely free of taxes, thus avoiding potential future income taxes at higher tax rates for retirees on those contributions.
Roth IRAs are also advantageous for people with a low income and high retirement savings. By paying taxes before contributing to a Roth IRA account, you’ll be able to let that money grow tax free and withdraw the contributions tax-free – potentially avoiding a higher tax liability on that money.

Disadvantage of Roth Conversions

A key disadvantage of Roth conversions is converting the tax-deferred money as it will create a taxable event. And for some people, a Roth IRA may not be the best saving strategy. Consider your financial goals and your financial plan to determine the best mix of retirement tools for you.
Before converting money to a Roth IRA account, investors should consult with a qualified tax professional to create a tax strategy in converting the funds to help avoid bumping up against one’s tax liabilities and paying unnecessary taxes due to the conversion.

If you don’t have a financial advisor and you have more questions about Roth conversions, you can set up a complimentary consultation meeting here.

We have experienced financial advisors who often help review the potential impacts of Roth conversions transaction.

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This content is provided for informational purposes only and is not intended to serve as the basis for financial decisions. E.A. Buck Financial Services is an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives.

Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA.

If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions.

Our firm is not permitted to offer tax or legal advice. Individuals are encouraged to consult with a qualified professional before making any decisions about their personal situation.

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