Planning in Action - Roth Conversions

A Roth Conversion is when you take a distribution from your tax-deferred IRA or 401(k), pay the tax on the distribution, and then deposit (convert) the funds into a Roth IRA or Roth 401(k) account. 

Benefits of a Roth Conversion

• Roth IRAs enjoy tax-free growth without the required minimum distributions (RMDs) at age 72.
• Roth IRAs diversify your “tax buckets” of investments between taxable, tax-deferred, and tax-free accounts. This gives you the flexibility to choose which account to draw from in retirement, based on your income needs in relation to your marginal tax rate.  
• Traditional and Roth IRA non-spouse beneficiaries are subject to the new 10-year rule (some exceptions apply) which requires complete distribution (a taxable event for Traditional IRAs) of the account by the end of the 10th year of inheritance. Converting to Roth could prevent a significant tax burden for your beneficiaries, especially if they are already in a high tax bracket.

Goal-Oriented Financial Planning

Let’s look at planning issues with a client who recently considered a Roth Conversion. We had several goals in mind when reviewing how much to convert:

• Keep the client in their current tax bracket.
• Determine the correct amount to convert to minimize future Medicare premiums.
• Convert most of a sizable IRA as a tax-free gift to his children.
• Implement a Qualified Charitable Distribution strategy to fulfill his IRA Required Minimum Distribution while reducing his overall income so he can convert even more to a Roth account. 

 There were many factors to consider with this Roth Conversion and it was essential to engage with our client’s CPA to confirm the tax analysis.   

Leaving a Legacy

Providing a tax-free legacy to one’s heirs is frequently a driving force for Roth Conversions. We can help you with this analysis.