Quarterly Hot Topic: ROTH IRA Conversions

ROTH IRA Conversion!

 To convert or not to convert - that is the question.  OK, not really.  But it has become quite a good tax planning strategy for retirement.  The reason for this is two-fold:

1) Tax Rates: the general belief is that tax rates will predominantly be going up over the next foreseeable future.  Paying taxes today maybe cheaper than paying tomorrow.

2) Shifting allocation of retirement savings to non-taxable allocation.

So, you can see the theme here is all about taxes!   UGH - not Taxes!  If you are going to talk about taxes, you know it can get complicated.  After all, the present tax code is over 67,000 pages long, while the average bible is somewhere around 1300.   Can I possibly summarize this topic in this newsletter - not even close.   So before I say anything, I'm going to suggest you consult with your tax advisor over this topic if you have questions.


In short, ROTH IRA conversions are simply a process of transferring all or some of your traditional IRA (or pre-tax retirement accounts) assets to that of at ROTH IRA.   Yet unlike other transfers, this one is a taxable event – every dollar converted being added to your taxable income.

The theory is that sooner or later you will need to withdraw money and pay taxes from your pre-tax retirement accounts.  If you can convert and pay taxes when your income is abnormally low (e.g. job change year, or early years in retirement) it may allow you to pay the tax at a rate that you do not normally see.  Further, allocating a percentage of your retirement assets into a tax-free account may provide withdrawal options that might keep you out of a higher tax bracket in the future.


Whether or not you should proceed may or may not make sense in any income range, yet in my opinion, should be part of everyone's long term retirement and tax planning strategy.  So, if you don't want to learn it yourself, then seek some help, but at least remember to ask about it.


If converting a Traditional IRA to a ROTH IRA, you will owe ordinary income taxes on any previously deducted Traditional IRA contributions and all earnings.  A conversion may place you in a higher tax bracket than you are in now.  Because Roth IRA conversions may not be appropriate for all investors, and individual situations vary we suggest that you discuss tax issues with a qualified tax advisor.


Securities offered through Royal Alliance Associates Inc., member FINRA/SIPC. Investment advisory services offered through Focus Financial Network, Inc., a registered investment advisor not affiliated with Royal Alliance Associates, Inc.  /  1000 Shelard Parkway, Suite 300, Minneapolis, MN  55426