A Roth conversion strategy may be your silver lining in a year full of surprises. The new debt created by COVID relief has increased the risk that tax rates will be higher in the future, making the Roth conversion very compelling.
Why convert to a Roth IRA?
- A key benefit of a Roth conversion is that it can possibly lower your taxes in the future. Because contributions to Roth IRAs are made with after-tax dollars, qualified distributions from a Roth IRA are tax free. Comparatively speaking, distributions from traditional IRAs are fully taxed as ordinary income.
- Another benefit of the Roth IRA is there are no required minimum distributions (RMDs), giving you more control of your retirement income. Traditional IRAs require distributions beginning at age 72.
- With a Roth IRA, you can withdraw your contributions (not earnings) at any time, for any reason, tax free.*
- Those normally ineligible for a Roth IRA can use the Roth conversion strategy to create a tax-free future pool of cash.
- Roth IRAs are more tax efficient for your IRA beneficiaries. The SECURE Act of 2019 eliminated the stretch IRA concept. IRA beneficiaries must now withdraw all IRA funds within 10 years. For beneficiaries, an inherited Roth retirement account is more tax efficient than an inherited traditional account.
Things to consider before converting to a Roth IRA:
- You must pay ordinary income taxes on the converted funds the year in which you convert . You should work closely with your NNP advisor and CPA to determine the best strategy. A multiyear conversion is frequently utilized to minimize the potential tax impact of a large conversion.
- You may not benefit if you expect your tax rate will be lower in the future.
- You must wait five years from the date the Roth IRA is opened to take tax-free withdrawals, even if you’re already age 59½.
- It may be wise to delay the Roth conversion if you do not have the necessary liquidity outside of the IRA to pay the conversion tax bill. We do not recommend using retirement funds to pay the tax bill.
* You may have to pay taxes and penalties on earnings in your Roth IRA.