Roth Conversions

A Roth conversion refers to taking some or all of the balance in a traditional IRA and moving it into a Roth IRA. When converting funds from a traditional to a Roth IRA, you must pay taxes on the balance converted in the year of conversion. However, once the balance converts to a Roth IRA, it will grow tax-free. It remains tax-free when withdrawn as long as the Roth IRA has been open for at least five years and you meet one of these conditions: you are at least 59 ½ years old, you pass away, you become disabled, or you make a qualified first-time home purchase. Here are a few items you should think about when considering a Roth conversion: • What is my current tax rate, and what do I think it will be in the future? If you expect that you will be in a higher tax bracket in the future, it may be a good time to consider taking advantage of your lower tax rate and converting traditional IRA assets to Roth IRA assets. Keep in mind – depending on the amount converted, the Roth conversion may bump you into a higher tax bracket which may dilute the effectiveness of the conversion. • Do I have any losses or large tax deductions in the current tax year? If so, it may be a great time for a Roth conversion, as those losses and/or tax deductions can help offset the additional income generated by the conversion. • Do I have enough cash to pay the taxes associated with the conversion? Roth conversions will increase your taxable income, which can result in a higher tax bill. Please be sure you have the cash to pay the associated taxes before going through a conversion. • What do I wish to do with the IRA when I pass? If you plan to leave your traditional IRA to charity, it is likely that it will not make sense to go through a Roth conversion. Alternatively, if you plan to leave your IRA assets to your heirs, the inheritance of Roth IRA assets generally is more advantageous from a tax perspective. Remember: You don’t have to convert all of your traditional IRA assets at one time; you can convert a portion of your traditional IRA or even spread the conversion out over a number of years. Of course, there are various other items to consider, which is why we always recommend that you work with your tax and financial advisors before implementing any significant financial decisions, including a Roth conversion.