Is It Time To Make A Roth IRA Conversion?

Over this past year, more clients have asked me about whether or not it makes sense to do a conversion from their Traditional IRA to a Roth IRA.   I’ve written before on the merits of a back door Roth IRA (http://bit.ly/2jNBfFA) before on Your Smart Money Moves, but the larger question about converting an existing account can be a tricky one to approach in your personal finances.   More importantly, if you are not proactive in your tax planning, you could miss a tremendous opportunity to take advantage of a bad year with your business or if you have a substantially down year of income.  Given the volume of planning cases I see every month, especially those in their late 40’s to late 50’s should be looking at this strategy very closely if you are in a transition phase.

With the potential upcoming changes in the tax code suggested to move from seven tax brackets down to three, each family needs to examine even more closely this potential concept of a Roth IRA conversion from a Traditional IRA.  Remember, good financial planning doesn’t mean you’ll only focus on the accumulation phase, but you also need to consider what will happen during the decumulation phase as well.   Not only considering the overall asset allocation you have in place today, but also overlaying your tax allocation to make sure your plan is set in the best direction possible.   Here are three items to closely look at when you consider making a Roth IRA conversion.

  • Did you have a really bad year of income – Many Baby Boomers and Gen X’ers will experience at least ONE year where they have a down income year.  This may be a year that you opened up a new business as a job transition, you took a sabbatical, your current business had a really bad year of results, or you went through a major job transition.   Remember, if you have a year where you actually had negative income with your itemized deductions, negative business income, etc., you can potentially offset the conversion of your Traditional IRA to Roth IRA against the negative income.  So, for example, if with all of your deductions your income was -$50,000 you could actually convert $50,000 of IRA money and still show zero income.   This strategy can potentially also work well in years where you claim major losses in real estate.
  • Consider that Required Minimum Distributions are far away, but not that far away – It’s incredibly difficult for someone who is 45 or 50 to be thinking about what will happen when they turn the age of 70 ½.  But, remember that Roth IRA’s are not subject to Required Minimum Distributions whereas all of your pre-tax money is going to be subject to Required Minimum Distributions.  This can be incredibly powerful as a strategy if you really don’t need the income from your IRA accounts.   It’s not only the fact that the cash will all come out Federal and State income tax free, but coupled with the fact that you don’t need RMD’s as a necessity is an important item to remember.
  • Consider that POTUS may potentially change taxes now and down the road – What’s likely the most difficult part of building a quality financial plan is trying to guess where tax rates will be 10, 15, or 20 years down the road.  As the balance of power changes, so does the overall tax rates thrown at us.   In the 1980’s Reagan had the tax rates simplified to just two income tax brackets in the 1980’s at 15% and 28%, and today we are currently at seven tax brackets with the top rate at 39.6%.   By having both pre-tax investments and Roth IRA type investments, you give yourself a lot more flexibility for distributing cash in the least taxable manner down the road.

If you aren’t sure whether or not to convert your Traditional IRA, then it’s probably best to seek out financial advice or talk to your CPA.   To Roth or not to Roth, that is the question.

About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

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My friends and family all think I’m a workaholic, but I say I’m just a guy that loves to help people do better in life.

My mother is still the only one that calls me by my real name Theodore Michael, my wife calls me Teddy, but for the rest of you it is just plain old Ted.

Ever since I was a little kid, I always loved money and being an entrepreneur. In fact, I still have cassette tapes of me talking to my grandmother at the age of five and my mother tells me all the time how much I played with money as a kid...

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

Background and qualification information is available at FINRA's BrokerCheck website.

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