Consider These Key Roth Conversion Factors in Your Financial Plan

Oct 2 • Financial Planning, Retirement Planning • 1312 Views • No Comments on Consider These Key Roth Conversion Factors in Your Financial Plan

As a wealth manager I’m often asked, “Can I covert a traditional IRA to a Roth?” and, “If I can, should I?” and “When is a good time to convert?”

There’s no blanket answer to those questions as the decision will depend on your particular circumstances.  There are key tax implications based on the different distributions between traditional and Roth IRAs.   It is important to focus the following four key factors in the conversion decision:

1. The tax rate differential. Compare your current tax rate with the tax rate bracket you expect to be in when you withdraw funds from your IRA in retirement. The lower your current rate as compared to the expected retirement rate, the greater the incentive to convert now. Conversely, you may not want to convert if your current rate is much higher than your expected rate during retirement.

2. Availability of non-IRA funds. Do you have funds on hand to pay a significant conversion tax? If you’ll be forced to siphon funds from your IRA to pay the tax bill, you’re diluting the future benefit of a conversion. But a conversion now could make sense if you have money in other accounts to cover the resulting tax.

3. Funds you have to pay living expenses. Will you need to begin drawing down IRA funds within the next few years? If you have to tap a Roth right away, you may not realize the full benefit of the tax-free distributions. If you can keep your IRA intact for a longer period, a conversion may be more attractive.

4. Time horizon. A Roth conversion may appeal to investors who are still several years from retirement. If retirement is imminent or you’re already retired, that may reduce your incentive to make a conversion. Nevertheless, switching to a Roth may still be reasonable if you’re older, especially if you’re looking for ways to preserve assets for your heirs.

Focusing on these four factors, crunch the numbers to see whether a Roth makes sense for your situation. One or more factors may count more heavily for you than others do, and we can help you do a detailed analysis.

Finally: Don’t worry about pulling the trigger on a conversion and then regretting your decision. You can “recharacterize” a Roth IRA as a traditional IRA if you make the decision in advance of the tax return due date (plus extensions) for the year of the conversion.

For more information, visit our website at www.makinglifecount.com or contact KHC President Matt Starkey at mstarkey@makinglifecount.com or (913) 345-1881.

Photo credit: StockMonkeys.com / Foter / CC BY

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