If you’re considering converting a Traditional IRA, SEP IRA, Simple IRA, or a 401(k) to a Roth IRA, you may be wondering, “Is a Roth conversion right for me?” First, it’s important to understand the main difference between a Roth and a Traditional IRA. A Roth IRA is funded with after-tax dollars and qualified distributions are tax-free. Unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs). Unfortunately, only individuals who meet the Roth IRA income limits can contribute to a Roth. You can work around the income limit by doing a Roth conversion IF it makes sense for your unique financial situation.
Income and Contribution Limits for Roth IRAs
|Filing Status||Modified Adjusted Gross Income (MAGI)||Contribution Limit|
Single, head of household, or married filing separately (if you did not live with your spouse at any time during the year)
|< $122,000||$6,000 ($7,000 if 50 or older)|
|≥ $122,000 but < $137,000||Partial contribution (phase-out range)|
|≥ $137,000||Not eligible to contribute|
Married filing jointly or qualified widow(er)
|< $193,000||$6,000 ($7,000 if 50 or older)|
|≥ $193,000 but < $203,000||Partial contribution (phase-out range)|
|≥ $203,000||Not eligible to contribute|
Married filing separately (if you lived with your spouse at any time during the year)
|< $10,000||Partial contribution (phase-out range)|
|≥ $10,000||Not eligible to contribute|
To qualify for a Roth conversion, there is no income limit or tax penalties if the funds are moved within a 60-day window. The amount that is converted is added to your individual income and is taxed at your regular income tax rate.
Is a Roth conversation right for you?
Do you believe you will be in a higher tax bracket when you retire?
Compare your current tax bracket to your future tax bracket in retirement. If you believe you will be in a higher tax bracket in retirement, then a Roth conversion may benefit you as you will pay less taxes in the long run. The money in your Roth IRA will grow tax-free and your withdrawals won’t be taxed in retirement. In addition, if you convert to a Roth IRA, you will not be required to take required minimum distributions (RMDs) when you turn age 70 ½.
Do you want to maximize your estate for your beneficiaries?
If you don’t need to tap into your retirement funds and prefer to leave them to your heirs, then a Roth conversion may allow your savings to grow more. Your beneficiaries will also benefit from tax-free withdrawals for their lifetime. It’s important to note that there is a five-year holding period for your beneficiaries to make a tax-free withdrawal. If the five-year holding period is not met, the earnings are subject to tax.
Where do you plan to live?
If you plan to move in retirement to a state with a higher income tax rate, then it may make sense to convert some, or all, of your IRA funds into a Roth IRA before you move. Again, assuming the five-year holding period is met, Roth withdrawals are federal income tax-free after age 59 1/2. If you plan to live in a state that has no income state tax, such as Florida, Texas, or South Dakota, then a Roth conversion may not make sense for you.
A Roth conversion may be a good idea for your unique retirement plan. Talk with your Financial Advisor to determine if a Roth conversion is right for you or send us a note in the box below!
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