converting the funds than you would withdrawing from a Traditional or Rollover IRA later in retirement . In this scenario , you end up with more money in your pocket . As an added benefit , you do not have to make required minimum distributions .
Another argument for a Roth Conversion is that taxes are going up . Tax laws are always changing , but when planning for the future , you need to use current law as a basis for your decisions –– we don ’ t know what tax law will be 10 , 20 or 30 years from now , especially for the majority of people in lower tax brackets . If you are in the highest tax bracket and always will be , then a conversion may make sense .
Keep in mind that you do not have to convert your entire IRA to a Roth . Doing a partial conversion makes sense if you will be pushed into a higher tax bracket by converting the whole IRA .
Other Considerations :
1 . If you do not need the money , and you intend for it to go to children or heirs in high tax brackets , consider paying the tax now , so your children get taxfree distributions later . Your heirs will be required to make required minimum distributions each year .
2 . If you plan to have your IRA money go to charity , then converting to a Roth will actually cost your charity money . Charities do not pay taxes on IRA donations when they are withdrawn , so in this case do not convert .
3 . If you have children in college or who will soon go to college , the added income on your tax return from a Roth Conversion can affect student financial aid .
Annuities in IRAs with insurance features pose a whole new set of complications . You should consult your financial advisor and tax professional before doing a conversion .
4 . In regular Roth IRAs , you are able to withdraw the principal at any time , tax and penalty free . If you convert money to a Roth IRA and are under age 59½ , you can ’ t withdraw the Roth Conversion contributions for five years . If you do , you ’ ll face a 10 % penalty . ( The rules for distributions of earnings are the same as with direct contributions .) There are exceptions for this rule for first time home buyers and certain hardships .
5 . IRS ’ s Pro-Rata rule : If you made non-deductible contributions to your Traditional IRA , you cannot separate the non-deductible portion of the IRA from the deductible portion . In other words , you can ’ t separate the coffee from the cream once mixed , even if you have separate IRAs for the different types of contributions , they are considered one IRA together when converting .
6 . It ’ s important to know that converting increases your taxable income , which means if you are covered under Medicare , the rates you pay for Medicare Part B and Part D Prescription Drugs may go up .
There are many factors to take into account when deciding if a Roth Conversion is right for you . With so many rules and considerations , this short article just begins to cover the basics . Please contact a Portfolio Solutions ® Financial Advisor to learn more .
The information contained herein cannot be relied upon for tax reporting purposes . To the extent that this material concerns tax matters , it is not intended or written to be used , and cannot be used , by a taxpayer for the purpose of avoiding penalties that may be imposed by law . Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances .
At Portfolio Solutions ®, we design , implement , and maintain dedicated portfolios using low‐cost , passive investing methods so our clients keep more of what the global markets offer . We would rather see investors earn more by controlling their investment costs than by taking unneeded , additional risk in their portfolios .
DENTON COUNTY Living Well Magazine | SEPTEMBER / OCTOBER 2016
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