Have you used an IRA to accumulate assets for retirement? The IRA is one of the most popular retirement savings vehicles. There are a few different IRA variations, but the Roth has become increasingly popular in recent years. Roth IRA balances grew 51 percent from 2010 to 2013, while traditional IRA balances grew 28 percent over that same period. In 2013 more than $6 billion was contributed to Roth accounts, while only $4.61 billion was contributed to traditional IRAs.1
One reason for the Roth’s popularity is its unique tax treatment. You make after-tax contributions to a Roth. However, your funds grow tax-deferred inside the Roth, and your withdrawals are tax-free as long as you wait until age 59½. That means you can use a Roth to create a tax-free income stream in retirement.
Fortunately, even if you’ve used a traditional IRA to accumulate assets, you can use a strategy known as a Roth conversion and still take advantage of the Roth’s unique tax structure. This strategy isn’t right for everyone, but it can be effective in the right situation. A financial professional can help you determine whether it’s right for you.
What is a Roth conversion?
As the name suggests, a Roth conversion is the process of converting your traditional IRA funds into a Roth account. This is usually initiated through paperwork from your IRA custodian or your financial professional. The IRA custodian liquidates the assets in the traditional IRA and transfers the funds to the newly created Roth. Once the funds are in the Roth, you can allocate them as you like.
Do you have to pay taxes on the conversion?
All distributions from a traditional IRA are taxable. That’s true even if you’re converting the funds to a Roth. You have to pay income taxes on the converted amount before the funds can move into the new Roth IRA.
You have the option of having the taxes withheld from the converted amount, but that may not be the wisest course of action. After all, the whole point of the conversion is to maximize your tax-free income in retirement. The best way to do that is to fund the Roth as much as possible. It may be helpful if you use other non-IRA funds to pay that tax bill. That way, the full conversion amount can go into the Roth and start accumulating on a tax-favored basis.
How could a conversion help your retirement?
The primary benefit of a Roth conversion is that it creates tax-free income in retirement. That income could help you better achieve your goals and live a more comfortable and financially stable lifestyle.
However, tax-free income isn’t the only benefit. Your Roth assets are also tax-free for your beneficiaries upon your death. Additionally, you won’t have to take required minimum distributions from your Roth at age 70½, as you would have to do with a traditional IRA. That means you can let your Roth assets accumulate as long as you want.
Ready to explore whether a Roth conversion is right for you? Let’s talk about it. Contact us today at DSM Financial. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
17750 - 2018/6/19