Should I Consider a Roth Conversion?

Have you considered converting to a Roth IRA? If you’ve had a traditional IRA (or SIMPLE/SEP IRA) for at least two years, it is eligible for conversion. Due to the current bear market, now is a great time to think about converting to a Roth IRA. Converted assets are subject to federal income tax during the year of conversion and if those assets in your traditional IRA have lost value, you’ll pay less taxes on them when you convert.

Here’s what you should know about Roth IRAs:

Benefits of a Roth IRA

There’s a multitude of benefits when it comes to owning a Roth IRA. Here are a few most notable ones:

• Any withdrawal from a Roth IRA is tax and penalty free if done at least five years after the establishment of any Roth IRA, and one of the following is applicable: you are at least 59 and a half at the time of withdrawal, the withdrawal was made on qualifying disability, the withdrawal was made by your beneficiary after your death, or the withdrawal was made to pay for first-time homebuyer expenses.
• Lifetime Required Minimum Distribution (RMD) rules don’t apply to Roth IRAs which means you aren’t required to make any withdrawals from your account unless it’s of your own choosing.
• Converting to a Roth IRA might reduce your countable assets and taxable estate for federal financial aid purposes.
• Conversion rules allow you to contribute to a Roth IRA even if you otherwise couldn’t due to the income limit on annual contributions.

What To Know About Converting to a Roth IRA

There are other important things to know about an IRA conversion that may impact your decision. Look at the following:

• If you think you’ll be in a better tax situation this year rather than the next, it may be better to act now instead of waiting to convert your IRA. This is because converted assets may be taxed during the year of conversion.
• The benefits of rolling over funds from a traditional IRA are significantly less if the only way you can pay the conversion tax is by using other IRA funds.
• There’s always a chance that the laws protecting Roth IRAs from tax-free qualified distributions may change in the future.
• Funds that are converted from a traditional IRA to a Roth are usually seen as taxable income for the year of conversion. If you’re receiving Social Security benefits, a conversion can increase your taxable portion of those benefits.

The end of the year is a good time to consider converting a tax-deferred savings account to a Roth IRA. We want to ensure that you are in the best possible position for meeting your financial goals and are aware of the tools that may help you along the way. Mize CPAs encourages our high net-worth clients to work with our related company, Prism Financial Group, L.L.C. Prism offers financial planning and investment management that assists clients in achieving their financial dream.

If you would like more information on converting your funds or connecting with Prism, contact us.