Converting retirement funds to a Roth account can be a powerful tool to reduce taxes long-term and preserve wealth.
Here are the basics of a Roth conversion:
- Funds in most pre-tax retirement accounts (401(k), 403(b), 457(b), SEP IRA, Traditional IRA) can be converted or rolled into a Roth IRA.
- Instead of being taxed on withdrawal, Roth IRA funds are not taxed when withdrawn, but tax is paid when funds go into a Roth account. With a Roth, you pay tax on the smaller amount (what you invest), not on the larger amount (what you invest plus all of the earnings).
- A Roth conversion is taxable income to you for the year that you make the conversion.
- You can convert up to the entire amount in your pre-tax retirement account. You don’t have to convert all of it and there isn’t a limit on the amount that can be converted to a Roth IRA.
- You’ll need to leave the funds in the Roth IRA for 5 years to avoid taxes or penalties on withdrawal.
- There is no income limit for a taxpayer wanting to do a Roth conversion.
- A Roth conversion cannot be reversed.
- It must be completed during the calendar year.
- A Roth IRA is not subject to Required Minimum Distributions.
- A Roth conversion may impact your Medicare premiums. Ask your financial advisor or Medicare-specialist about IRMAA.
- A Roth conversion may impact the amount of your Social Security that is taxable.
Tips for maximizing your Roth conversion:
- Talk with your accountant about the tax impact.
- Consider “chunking” where you convert smaller amounts over several years. This can help keep the overall tax burden down.
- Always pay the tax from other funds (don’t have the taxes withheld from the conversion).
Please book a discovery call to find out how we can help you with your Roth conversion.
Reducing Taxes – Increasing Wealth
Please understand that I cannot give you specific investment or legal advice, just guidance in these areas, and you should consult a professional licensed in these areas for specific advice before making any final decisions.
