Outside Economics

Is Converting to a Roth IRA the right move for you?

Posted by Wendell Brock, MBA, ChFC on Thu, Aug 08, 2013

Until 2010, Roth IRAs were available only to those making less than $100,000 a year. That cap has been eliminated.
Roth IRA - Retirement
10 Reasons a Roth IRA is the best decision right now
1.    Your tax rate will be increasing
•      Those who expect to be in the top tax bracket for the foreseeable future, or high-bracket individuals who expect to leave their estates to heirs who are also in the top bracket. 

2.    You are moving to a higher tax state
•      If you now live in a state without an income tax such as Florida, Texas or Nevada and expect to move to a high tax state such as Oregon, California, Hawaii or New York before or in retirement, consider converting now.

3.    You won’t need your IRA at age 70 ½
•      Those who have a large estate and won't need to take distributions to live on. With Roth conversions, there are no mandatory distributions at age 70½. If you don't need those distributions early in your retirement, a Roth will let you preserve your IRA, growing tax free, for when you really need it.

4.    You are leaving money to your posterity
•      If you don't anticipate needing any of your IRA money to live on in retirement, you can save it for children or grandchildren. You can leave the Roth untouched and after your death, your heirs can stretch out tax-free withdrawals over their own lives.

5.    You expect to have a taxable estate
•      By converting, you reduce the size of your estate that may be subject to the estate tax. The federal estate tax kick in on estates valued at $5.12 million per person. Plus, 22 states and Washington, D.C., have their own estate and inheritance taxes.

6.    Your IRA investments have tanked
•      If the holdings in your IRA have plummeted and seem ready for a rebound, converting to a Roth now is to your advantage. This is because if your investments are flat or down when it's time to file your 2013 returns in 2014, you can undo that conversion and not pay any conversion tax.
•      It is suggested you should put a conversion into several Roths, for example, emerging market mutual funds in one, large cap stocks in a second, small caps in a third. Then, you can unwind those conversions where it makes sense as the deadline approaches.

7.    You plan on using non IRA funds to pay for the conversion tax
•      Even if your tax rate will be the same in retirement, you may benefit from a conversion if you can pay the tax on it from funds outside your IRA. This is particularly true if you won't need to use the funds in the Roth for many years.

8.    You have special tax items
•      If you have net operating loss carry-forwards, charitable deduction carry-forwards, a high basis in your IRA (lots of after-tax contributions) or some other situation that can offset or reduce taxable income from a Roth conversion, it's a good time to convert.

9.    You recently lost a spouse
•      Federal tax brackets are more favorable for married couples filing joint returns than for single individuals. If you've just been widowed, you may want to convert to take advantage of lower joint rates available to you now. Later, as a single, you can take the money out tax-free.

10.    Your social security may be taxed
•         Up to 85% of your Social Security retirement check is taxable, but only if your other income is above a certain level. Roth distributions aren't counted as income for the purposes of that count, even though tax-free municipal bond income is. If you will have modest retirement income, a Roth conversion may help you limit the tax on your Social Security check.

Converting to a Roth IRA should be considered after reviewing all its various consequences.  It is not always an easy decision. Run the numbers and see what the challenges are – it just may be to your great advantage to make the move.

Topics: Roth IRA, IRA, Converting to IRA


Wendell W. Brock, MBA, ChFC

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