Proposed new rules for ROTH conversions
By LouAnn Schulfer, AWMA®, AIF®
We’ve helped a lot of people with complicated circumstances over the years make decisions regarding ROTH IRA conversions. One must consider their income tax consequences on the converted amount, the withdrawal limitations from a ROTH IRA and the income limitations for future contributions to a Roth IRA, to name a few. Additionally, if one is required to take an RMD in the year that they wish to convert, they must do so prior to the conversion.
Back-door conversions have been a favorable option for some, particularly if their career path elevated their income beyond limits to contribute. With a back-door strategy, one would make a non-deductible contribution to an IRA and immediately convert to a ROTH IRA. The key point to remember is that back-door conversions involve non-deductible contributions of already taxed dollars. Ordinary Roth IRA conversions are when pre-tax dollars are converted, such as from a traditional IRA to a Roth IRA, creating an income-taxable event. Back-door conversions are on the agenda of congress to be banned, as the House Ways and Means Committee has already approved outlawing this strategy.
Pre-tax conversions could be subject to income limitations starting in 2032. Fortunately, this gives people an equal chance, regardless of income, to convert traditional IRA dollars to ROTH dollars for about
another 10 years. Win-Win, as the conversion results in potential tax-free growth for the Roth IRA owner and the IRS benefits from the income tax bills paid from said conversions.
If you have been thinking about ROTH IRA strategies, you may wish to consider your options before the proposed new rules take hold for different types of ROTH IRA conversions.
LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or firstname.lastname@example.org. www.SchulferAndAssociates.com.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.