Considering a Roth IRA conversion?


Anthony Engrassia


Business Columnist

Monday, July 9, 2018

With a Roth IRA — if income eligibility requirements are met — you can only contribute after-tax dollars.

A Roth IRA contribution won’t reduce your taxable income the year you make it, however, there are no taxes on your future earnings and no penalties when you take a distribution, provided you hold the account for five years and meet one of the following conditions: you are age 59½ or older; are disabled; make a qualified first-time home purchase (lifetime limit $10,000); or have died. Also, be aware that while your earnings may be subject to taxes and penalties if withdrawn before those conditions are met, your contributions can be withdrawn at any time without tax or penalty. Roth IRAs have no required minimum distributions (RMDs) during the lifetime of the original owner so they can also be useful vehicles for estate planning.

Prior to 2010, to be able to convert from a traditional IRA to a Roth IRA, your income needed to be under a certain limit. The IRS rules have changed and there is no longer an income cap for Roth IRA conversions. With the cap removed, regardless of your income, anyone can now convert to a Roth IRA, as long as they pay the appropriate tax on the conversion. If you convert to a Roth IRA, you will have to pay taxes on any tax-deferred deposits and investment gains at the time of the conversion.

Why Convert to a Roth? Most people want to pay as little income tax as possible. Converting to a Roth IRA may allow you to make a tax move that will save you or your beneficiary’s money in the long run.

For example, if you anticipate your income dropping significantly in a certain year and increasing in following years, you could plan a conversion, or partial conversion, for the low-income year. Since your income is lower, you may be in a lower tax bracket when you convert.

Similarly, if the government announces a tax-rate increase to go into effect in a future year, a conversion in the current year could possibly save income tax.

Remember before converting to a Roth IRA and to see if it’s right for you be sure to consult with your Financial Planner and Tax Consultant.

Why Not Convert to a Roth? You have to pay taxes on the amount converted in the year of conversion. Converting could push you into a higher tax bracket for that year.

A drop in taxes after you convert could result in your being in a lower tax bracket later in life and conversion might not be as beneficial.

Anthony Engrassia is an investment adviser representative of Mutual of Omaha Investor Services.