By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management Advisor^SM
Accredited Investment Fiduciary®

Should you convert all or part of your IRA to a ROTH IRA?  That depends.  There are pros and cons that may apply uniquely to each person’s financial situation.  Properly analyzing your circumstances may uncover a great opportunity.  However, understand the rules to avoid unexpected future surprises that may come as substantial drawbacks.

The purpose of a ROTH IRA is to allow your money to grow tax deferred and take distributions on a tax-free basis.  The IRS has distribution rules for conversions that are different from those which apply to contributions.  With a conversion, you must wait at least five years to withdraw the converted principal if you are under 59 ½, or you will be assessed a 10% penalty.  The principal of ROTH IRA contributions, however, may be withdrawn at any time penalty free regardless of age.  Wait until you are 59 ½ in either circumstance to withdraw the growth in the ROTH to avoid taxes and penalties.

Be prepared for a tax bill due in the tax year that you make the conversion, at your ordinary income tax rate.  For example, if you convert $50,000, you’ll have $50,000 of taxable income added on to your 1040 (tax form).  The good news is, with the 2018 Tax Cuts and Jobs Act, tax brackets are lower and standard deductions are higher.  This means that for most people, converting under the current tax laws may mean paying less in overall taxes during the window between 2018 – 2025.  Currently, the tax rates are set to sunset after 2025, meaning they go back to pre-2018 levels.  I have however, worked with clients who’ve considered conversions ultimately finding it best to not convert.  Their income is substantially higher now than they expect it to be in retirement, therefore they’d pay a higher tax rate upon conversion now than they would down the road when they are retired and taking distributions.  If your income happens to fluctuate however, such as many of my business owner clients, there may be windows of opportunity for conversions in years that adjusted gross income dips due to less earnings or higher deductible expenses.

There was a time when your income level may have prohibited you from enacting a conversion.  Since 2010, the amount of money you make no longer affects your eligibility for conversions.  Adjusted Gross Income determines whether or not you can make contributions to a ROTH, but anyone, regardless of income, can convert all or some of their traditional IRA dollars to a ROTH.   A significant change with the new tax law, however, is that you cannot “undo” the conversion in the tax year it is made.  So, be sure the conversion is in your best interest before you take action.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. You should discuss your specific situation with the appropriate professional before making any decision.

Future tax laws can change at any time and may impact the benefits of Roth IRAs.

LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Financial Professionals and can be reached at (715) 343-9600 or[email protected].  www.SchulferAndAssociates.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.  ​