By Faith Investment Services
Bluffton, 419-358-4207
Roth IRAs offer many advantages over a Traditional IRA, including tax-free growth potential and tax-free withdrawals in retirement. If your income fits within the guidelines for contributing to a Roth IRA, you can set up an account, make contributions, and watch it grow tax-free. If you aren't able to contribute to a Roth IRA because of the income limits, a Roth conversion of your eligible retirement accounts is another way to have a Roth account. Doing a Roth conversion means that you will have to pay tax at your effective income tax rate on any portion you convert.
But does it always make sense to convert? Is it better at certain ages or certain economic tiers? Everyone’s situation is unique and we recommend talking with trusted advisers such as your tax adviser or financial adviser. This is not a one-size-fits-all decision.
Some factors to examine if you are considering a Roth conversion:
1. What impact does state tax have?
Some states exclude retirement income in full or in part —such as distributions from a traditional IRA—from state income tax. So if you live in, or plan to move to, a state that excludes that income, a conversion from a traditional IRA to a Roth IRA may be less attractive for you.
If you’re planning to move to a state with a higher state income tax rate than that of your current one, it might make sense to convert at least some of your eligible assets to a Roth IRA before you move. Similarly, if you're moving from a state with a higher tax rate to one with a lower rate—or no income tax—you may want to delay or avoid a conversion.
2. Required minimum distributions (RMDs)
Traditional IRAs, Roth and traditional 401(k)s, 403(b)s, and other employer-sponsored retirement savings plans require RMDs, starting at age 70½. If you don't need the income from these distributions to meet current retirement expenses, RMDs can be annoying. They need to be calculated each year, may provide unnecessary taxable income, and, if you miss taking one, can result in stiff penalties. Roth IRAs do not have required minimum distributions during the life of the original owner.
3. Leaving money to others
If you're planning to leave retirement accounts to heirs, think about the tax implications. Because of their RMDs, inherited traditional IRAs generate taxable income for heirs, often during their highest earning years. These distributions could incur taxes when they'd rather avoid them or could unintentionally push them into a higher tax bracket. Inheriting Roth IRA assets, which generally don't incur any income taxes, can be a benefit to your heirs. This doesn’t matter as much if your heirs are likely to be in a much lower tax bracket than you – better for them to pay low taxes in the future than for you to pay high taxes now.
Also, Roth IRA conversions may not be helpful to those who intend to leave at least some of their assets to charitable institutions. Traditional IRAs can typically be left to charity without any tax bill at all for either party. So, in that case, conversion will mean that the tax was paid needlessly.
4. College-age children
If you have children who are in or approaching college who are applying for financial aid, a Roth IRA conversion may have an impact. Because the amount converted is treated as income, it's included in the needs test on the Free Application for Federal Student Aid (FAFSA) and can potentially raise a parent's expected financial contribution (EFC) and reduce aid.
5. Current low tax brackets
The tax brackets are currently low and this could possibly be a great time to pay the tax to convert.
Talk to Faith Investments soon about whether a Roth conversion might be helpful for you. This is especially critical if 2019 finds you in a relatively low tax bracket or if you have quite a few years of earnings remaining. Call 419-358-4207 or email [email protected]
Advisory Services are offered through Creative Financial Designs, Inc., a Registered Investment Adviser, and Securities are offered through cfd Investments, Inc., a Registered Broker/Dealer, Member FINRA & SIPC, 2704 S. Goyer Rd., Kokomo, IN 46902. 765-453-9600. Faith Investment Services is independently owned and not controlled by the CFD Companies.
