An effective strategy for evaluating retirement and estate planning options is to consider converting a traditional IRA to a Roth IRA. Revisiting Roth conversions may be appropriate due to recent market valuations given the volatile market decline.
Points to consider:
- Because of current market conditions, IRA portfolios have been devalued. Converting now would save tax dollars upon conversion and once the market recovers, those gains would be tax free (after 5 years).
- For the 2022 tax year, scheduled are lower marginal federal tax brackets until 2026, unless Congress changes the 2022 tax brackets through tax reform. It could be advantageous to convert given the lower tax rate.
- Non-spouse Designated Beneficiaries can allow an Inherited Roth IRA continue to grow, take the distribution in year 10 totally tax free.
- It’s best to pay the tax from a non-retirement account. Paying the tax out of IRA proceeds, could mean you would pay a 10% penalty on that portion of the IRA, if you are under 59½.
- If you are relocating to a state with no or lower state tax, a conversion may not be appropriate.
- The conversion may push you into higher tax bracket.
- If your employer has an account option, placing a portion of your 401K funds into a Roth IRA would be appropriate.
- Roth IRAs currently do not have a required minimum distribution requirement (RMD).
- Roth IRAS are presently income tax free upon distribution and are not subject to RMDs, there have been some efforts to limit Roth IRAs. Most notably, the $5 billion Roth IRA owned by founder Peter Theil, gave him the ability to exercise stock positions with no taxation. Laws in the future may change for taxpayers in higher tax brackets, they would be required to pay tax on Roth earnings or make RMDs.
The Fiduciaries at Winthrop Partners have considerable experience in Roth conversions, pros and cons for many clients. Let our experience work for you. Contact Ryan Carney for a free consultation. 716-322-7478 [email protected]
WINTHROP PARTNERS is a Fee-Only Fiduciary and Wealth Advisor that provides Investment Management and Wealth Plans to individuals in Buffalo and Erie County.
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The views, opinions, and content presented herein are for informational purposes only. They are not intended to reflect a current or past recommendation; investment, legal, tax, or accounting advice of any kind; nor a solicitation of an offer to buy or sell any securities or investment services. Winthrop Partners does not provide tax advice or legal advice. Before taking any action, you should first consult with a tax or legal professional.
Ryan Carney is a Partner at Winthrop Partners. With nearly 10 years of experience in financial services, Ryan began his career with Fidelity Investments and First Niagara Financial Group. In 2018 he was named by Buffalo Business First’s as a “30 under 30” honoree. He earned his B.S. in Economics from Bowdoin College and is a Certified Financial Planner.