roth ira conversion

A Toast to William Roth
Person putting a coin in a piggy bank.

Approaching this season of holiday cheer, we are thinking about William Roth—and may even raise a glass in his honor.

Senator Roth was instrumental in creating something new. It appeared in the Tax Reform Act of 1997. And it has some wonderful features. It’s…

  • A retirement account, but after five years you may withdraw your deposits for any reason without tax or penalty.
  • A retirement account, but it may be used to educate your children or grandchildren without penalty or tax.
  • A retirement account, but there are no income taxes due on withdrawals during retirement.

The Roth IRA, as we know it, is a useful addition to the plans and planning of many people. Contributions may be made by those with earned income (but not too much earned income: there is an upper limit.) Conversions from traditional IRAs may be made by anyone willing to pay tax on the converted amount.

You may be eligible to put up to $6,500 into a Roth IRA for 2023, anytime until tax filing time in 2024. And the limit for 2024 is $7,000. And those of us lucky enough to be 50 years old or older could contribute an extra $1,000 beyond that as a catch-up.

If you have traditional retirement accounts, you may be eligible to convert part to a Roth IRA. There are no income limits on conversions; if you believe tax rates may be higher for you in the future, it might make sense to do a conversion. These happen on a calendar year deadline, however, so 2023 conversions must actually be done in 2023, for example.

Although a Roth IRA may not be right for everyone, the concept was and is right for me. I’m getting tax-free capital gains, tax-free dividends on blue chip stocks, and tax-free interest because I have investments inside a Roth IRA.

And I can take funds out and spend them (or give them away), any day, with zero tax.

If this might be right for you, please email us or call.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

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Play the audio version of this post below:

A Toast to William Roth – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

The Swiss Army Knife of Finance
photo shows a Swiss Army knife

Some people consider the Roth IRA the “Swiss Army knife of finance.” A versatile tool, a Roth is useful in a lot of different circumstances. It might make sense to run through a review before year-end: your 2020 income tax situation may have an impact on your thinking. 

Here are just a few uses of the Roth IRA to consider:

1. They can help you manage your lifetime total taxes. 

You may be able to take advantage of relatively lower tax brackets now before income tax rates go up, as they are scheduled to after 2025 or in the case that future legislation raises tax rates. Converting existing retirement balances to Roth makes the amount converted taxable now—but wipes out taxes on future gains. 

Moving temporarily depressed holdings from traditional IRAs to Roth involves paying tax only on the lower current value. Any recovery ends up being free of tax. (Airlines are an example of depressed stocks that may recover. No guarantees of course.)

2. They can add flexibility to your retirement planning.  

Unlike traditional IRA balances, Roth IRAs do not have required minimum distributions (or RMDs). And they are a useful place to go for large retirement outlays without making a bulge in your tax bill. Planning to buy a second home, boat, or camper in retirement? Roth money might come in handy then.

3. They can make great gifts. 

Roth IRAs can be wonderful for children or grandchildren with earned income who qualify to make Roth deposits because they have earnings but lack the funds with which to make deposits. Growth over the decades ahead may never be taxed.

4. They can help fund an education. 

Parents seeking versatile education funding for their children may use their own Roth IRAs as a source of funds for that purpose. If not needed, the money may remain in the Roth and ultimately help fund their own retirement. 

Right for you? 

Again, the Roth is a versatile tool! What from the list is jumping out to you? 

We understand that the end of the year can be a busy time. We would love to help you sort out these issues—just email us or call if they are pertinent to you. 

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Silver Lining Playbook

© Can Stock Photo / AnglianArt

Recent market action featured normal stock market volatility in a remarkably compressed time period. (We all know which direction the volatility took us, don’t we?)

Some clients see a silver lining in stock market downturns. They are able to do Roth IRA conversions on a more favorable basis. These transactions are taxed on the value transferred from traditional IRA or rollover accounts into Roth IRA accounts.

Think about $60,000 invested that temporarily declines to $50,000 before bouncing back to $60,000. If the conversion happens at the low point, tax is paid on $50,000 but the Roth ends up with $60,000 of assets. This is a way to build after-tax wealth over the long term. If the rules are followed, gains in the Roth are never taxed, even when withdrawn.

By intentionally selecting the specific holdings with the most potential to snap back, an additional edge may be gained. (Of course, we have no guarantees on the selections we make.)

Many of you are looking at the lowest tax brackets in years, due to recent tax reform, changes that are scheduled to disappear in the years ahead. And income tax rates may rise anyway, as the government seeks to deal with record borrowing and national debt.

So the silver lining in the stock market decline is a pair of potential advantages in Roth IRA conversions: we may be converting assets at a temporary market value discount, taxed at temporarily low tax rates.

We have a crystal ball. It does not work. We could be wrong about future tax rates, and nobody knows their own specific future tax situation. And there is no guarantee that depressed investments rise again. We just do the best we can with what we know.

Clients, if you would like to talk about this or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.