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Should You Do a Roth Conversion?

Out of all the ways to save for retirement, funding a Traditional or Roth 401(k)/403(b) is a popular option for many individuals. If you’re in need of a quick refresher of the differences between the two, CSi’s Kristi Baker offers a breakdown in the To Roth or Not to Roth video below:

A recent topic of conversation in the retirement planning space has been Roth Conversions.


What is a Roth Conversion?

A Roth conversion refers to the transfer of assets from a traditional retirement account into a Roth.

Advantages of a Roth Conversion

One of the major advantages of a conversion is its potential to reduce future tax liability. Taxes must be paid on any amount that is moved from the traditional account to the Roth, but once the funds are settled in their new account, the earnings grow tax free.


It’s important to note that following the IRS’s 5-Year Rule, the Roth account must be established for five years before the owner can take distributions free of the 10% penalty.


Why Is 2021 a Good Time to Consider a Roth Conversion?

Compared to tax rates before the passing of the Tax Cuts and Jobs Act of 2017 (TCJA), present rates are relatively low. However, with TCJA provisions set to expire in 2025 and a new administration in office, it’s likely the current tax environment won’t be the same for much longer. With changes on the horizon, 2021 may be the most advantageous time for investors who are considering conversion to take action before tax rates increase again.


Are You a Good Candidate for Conversion?

Although there are many advantages of a Roth conversion, depending on personal financial situations, it may not benefit everyone.


An individual should consider converting if any of these situations apply:

  • Young people who expect their incomes (and tax brackets) to increase down the road

  • They feel that when they retire, they will have income that puts them in a higher tax bracket than their current bracket

  • Anyone between the ages of 60-72 who is retired and on a limited income of Social Security

  • Investors who are hoping to leave a tax-free legacy behind for their heirs


Next Steps and Resources

Before you begin a conversion, it is imperative you speak with a tax advisor or financial consultant about your personal tax situation.


Expert guidance is also suggested due to the fact that investors must be careful not to convert an amount that would bump them into a higher tax bracket.


It is also important to note that in accordance with the Tax Cuts and Jobs Act of 2017, once a Roth conversion has taken place, it cannot be reverted back into a traditional IRA later.


Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.


If you have questions about whether a Roth Conversion may be right for you, contact our office at (317) 844-3256 or info@csiadvisoryservices.com.


 

Sources:


1. Kenney, Mark. “When Roth Conversions Are the Right Move – and When They Aren't.” Kiplinger. Kiplinger, January 15, 2021. https://www.kiplinger.com/retirement/retirement-plans/roth-iras/602082/when-roth-conversions-are-the-right-move-and-when-they.


2. Kagan, Julia. “Recharacterization Definition.” Investopedia. Investopedia, December 14, 2020. https://www.investopedia.com/terms/r/recharacterization.asp.

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