As more and more baby boomers continue to reach retirement age, many are looking at the benefits of converting traditional IRA accounts to Roth IRAs. The way a Roth conversion works is that tax would be due on the converted amount since it was compiled with pre-tax dollars. The Roth account would then grow tax-free and future distributions would be tax free. Obviously, this only makes sense if you expect that your tax rates will go up in the future.
Of course, future tax rates are the big wild card! No one can predict for sure where rates will go. Some feel that with the national debt growing and massive Social Security liabilities coming due, that higher rates are inevitable. They argue that folks should be taking advantage of today’s historically low rates. The lower rates that came in with the Tax Cut and Jobs Act are temporary and generally have an end date of December 31, 2025. So, could this be the day of reckoning? Maybe. But then again, President Trump has already floated the idea of making the TCJA tax cuts permanent, so maybe there is still hope?
The bottom line is that we have to work with the facts as they are now and determine if your particular situation is ideal for a Roth conversion. Generally, if you are in the two lowest brackets of 10% and 12%, it would be wise to do only enough conversions to stay in that bracket. The 12% bracket jumps up to 22% at taxable income of $ 78,950 for joint returns.
Another downside of conversions is that converted amounts need to be held five years to avoid a 10% penalty on withdrawals. So, you would need to pay the taxes out of other funds, not the converted funds. This could be a deal breaker for some.
Therefore, if you are wondering if a Roth conversion is right for you, the answer is the same as for most other tax situation: IT DEPENDS! Every situation is unique so if you are considering this tax move, please give me a call.
David K. Raye, CPA 704-887-5298 [email protected]
*The information in this blog post is general in nature and not intended as specific advice. Please consult a tax advisor to see how this information applies to your specific situation.