fbpx

5 Considerations Before Making a Roth IRA Conversion

IRA conversionWe are all aware that a  Roth IRA, with its unique tax advantages over a traditional IRA, however, rolling a conversion is not always the right move for everyone.

Although Roth IRA conversions are popular, there are a few key things to consider before moving forward. Here are the five considerations I found that need consideration:

  • Your tax bracket during retirement. These days it's not unusual for retirees to be in a higher tax bracket during retirement. However, many of us have the option of investing in a Roth IRA, which doesn't offer an up-front tax break—but lets you withdraw funds in retirement tax-free. If you think you are going to be in a higher tax bracket when you retire, you might consider converting some or all of your retirement savings to a Roth before you retire. Converting some or all of your traditional IRA money to a Roth IRA will also give you some tax diversification in retirement to hedge against future changes in tax rates and related rules.
  • Benefits for Estate Planning. One of the great things about a Roth IRA is that it isn't subject to required minimum distributions (RMDs) at age 70½, unlike a traditional IRA, where you must withdraw an IRS-mandated amount annually at that age. Plus, it's subject to income taxes. Roth IRAs can continue to grow tax-free for as long as you live, and if your beneficiary is your spouse, he or she can roll over the account and make the Roth IRA his or her own with the same rules (non-spousal beneficiaries are subject to an RMD, but that distribution isn't taxed). In addition, non-spousal beneficiaries can take the RMDs over their entire life expectancy. This is a terrific benefit for younger beneficiaries like children or grandchildren.
  • Brace yourself for the tax hit. The big minus for a Roth IRA conversion is that any funds you convert will be subject to income tax in the year of the conversion. That means folks should consider whether they can cover the tax bill and generate enough investment growth to offset the impact. Plus, there may be other considerations—like estate planning—that become more important than "payback" concerns.
  • Remember Financial Aid. If you have college-age children who will be applying for FAFSA (Federal Student Aid), you may want to avoid Roth conversions as the calculation for their aid is being made. The extra taxable income these conversions reflect on our tax return could very likely affect their eligibility or the amount of aid.
  • Beware a Volatile Stock market. Maybe the only time we'll celebrate a  drop in the stock market is when we are trying to convert a traditional IRA to a Roth IRA.  With the drop in value in our IRA as we convert we'll get more bang for our buck. We'll be converting a lower amount and paying less in taxes. If you're thinking about rolling over your traditional IRA, consider taking advantage of the stock market correction by converting a larger portion of your traditional account – think of it as "buying low and selling high."

Converting your traditional IRA to a Roth IRA is a powerful tool that can provide financial planning options for many. But before you make a Roth conversion, consider the pros and the cons.  We are here to help you with that.  Schedule a complimentary consultation with our office today.

Reference: Motley Fool (February 27, 2016) "5 Things to Consider Before Making a Roth IRA Conversion"

 

Like this article?

Share on facebook
Share on Facebook
Share on twitter
Share on Twitter
Share on linkedin
Share on Linkdin
Share on pinterest
Share on Pinterest

Leave a comment

LIKE THIS POST?

We have a LOT more where that came from!

We hate spam too. We will never share or sell your information.

Call Now ButtonCall Us Now https://jsfiddle.net/7h5246b8/

Request a free consultation

We hate spam too. We will never share or sell your information.

We've been putting together as many resources as possible so that we can continue to help:

  • If you’re a current client with a signing appointment or a prospective client with a consultation and would prefer that meeting take place in your own home, we can accomplish that with a little bit of pre-planning on our part and with the addition of a laptop, smartphone, tablet or other computer in your home to facilitate this virtual meeting. For those of you that need to sign legal documents, that too can be accomplished with the use of a webcam (FaceTime etc.), so that we can witness and electronically notarize all of your important legal documents.
  • We launched the rollout of our on-demand webinar early so that new clients and our allied professionals can view the important component parts of ‘an estate plan that works’ at their convenience.  That is available on our website.
  • Live video workshops will be produced as quickly as possible and certainly ahead of our previous schedule; we will keep you posted as these events become available. Given the ‘boutique’ nature of the firm, we rarely have more than ten people in our office including team members at any one time. During this period of ‘social distancing,’ we promise to have no more than 8 people at any time.   This allows us to comply with the Governor’s directive to limit in-person gatherings.
  • The best way to communicate with us is still by phone during regular office hours of 8:30 to 5:00, Monday through Friday, or, you can email any of our team members (that is, their first name followed by @zarembalaw.com).  We will respond to these emails as quickly as possible.
  • Please continue to follow the directives of our local, state, and federal agencies. For your health and in consideration of our team who is assisting you, if you’ve scheduled an office appointment or planned to drop off paperwork and are experiencing a fever, dry cough, or shortness of breath, please contact your primary care doctor for guidance and then our office to reschedule.

Thank you, Walt and the Zaremba Team

Coronavirus/Covid-19
Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.