What is an IRA Conversion and How to Make the Switch

A Roth conversion is a simple adjustment that turns your Traditional IRA into a Roth IRA. This conversion can provide long-term tax benefits. However, before you convert your IRA, it is important to understand if making the change is right for you. 

Is a Roth IRA conversion right for you?
Though at the forefront, a Roth conversion seems like its benefits far outweigh any negative effects, there are a few factors to take into consideration to ensure it is the right move. 

A conversion is right if:

  • You want your investment to be able to grow tax-free
  • You want to protect your earnings from being taxed in your retirement 
  • You want to avoid any required minimum distributions (RMDs) 

A conversion might not be right if:

  • You do not have the means to pay the taxes required for the conversion
  • You want to withdraw your funds in 5 years or less
  • You have college-aged students who are applying for FASFA and do not want to increase your perceived income 
  • You want to leave your IRA to your heirs, but they are in a lower tax bracket than you 

How can I make a Roth IRA conversion?
Once you know if a Roth conversion is right for you, ensure you have funds in an existing Traditional IRA. Then, contact the Huberty team to help you open a Roth IRA, make the conversion, and assist you in a plan to pay the taxes. 

When should I make my Roth IRA conversion?
It is important to know that you don’t have to convert your entire Traditional IRA at once in the case that you can’t afford to pay the taxes in full. However, there are some strategies to ensure you are making the conversion at the right time. You should consider converting when:

  • You fall into a lower tax bracket or think in the next year you will move to a higher tax bracket
  • The stock market dips, and your current Traditional IRA balance is low 

There are numerous other factors to take into consideration when looking to make a Roth conversion, like workplace retirement plans and Medicare surtaxes. Work with our Wealth Management team to find the best option for you!

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Financial Specialists LLC nor any of its representatives may give legal or tax advice.

-Written by Eric E. Gurholt, CPA/PFS, CFP® | Financial Advisor


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