With Taxes on Sale, Consider a Roth Conversion


With Taxes on Sale, Consider a Roth Conversion to Make the Most of Lower Rates

Judging whether you’re a good candidate for a Roth IRA conversion requires some thought, but if you answer yes to these three questions, it could be worth considering.

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Financial professionals have long debated the pros and cons, timing and how-tos of converting a traditional IRA into a Roth IRA.

SEE ALSO: Roth IRA Utopia: Is Now the Right Time to Convert?

Is it a good idea for you? Unfortunately, the short answer is, “It depends.” The longer answer involves predicting your income and income-tax bracket over many years — something that isn’t easy to do.

3 Questions to Assess Your Own Situation

You’d be wise to tap into the knowledge of your own tax and financial advisers, maybe even your estate attorney, to help you look at your personal situation. But you can start by asking yourself these questions:

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  1. Do you think, between now and your death, tax rates will go higher?
  2. Do you expect the value of your retirement accounts to increase?
  3. If you had the opportunity to pay taxes on your retirement savings at a lower rate right now, would you grab it?
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    If, like most people I talk to, your answer to all three questions is yes, then now may very well be the right time to explore converting some of your traditional IRA dollars to a Roth. Because, thanks to the 2017 Tax Cuts and Jobs Act, taxes are on sale.

    No matter what you think about these tax reforms and what the long-range consequences will be for the country, the fact is that many people will pay less in taxes this year and until at least 2025. All the marginal tax brackets have been lowered except for couples and singles in the $400,000 range. And standard deduction amounts have increased to $12,000 for individuals, $18,000 for heads of household and $24,000 for married couples filing jointly and surviving spouses.

    Fill Up Your Tax ‘Buckets’

    Which means it’s time to take another look at your nest egg and how it’s built around the three tax “buckets” with taxable, tax-deferred and tax-free investments and savings.

    SEE ALSO: 26 Ways the New Tax Law Will Affect Your Wallet

    If you’re like many savers, your tax-deferred bucket has been filling up slowly but surely over the years, as you’ve contributed regularly to a 401(k), 403(b) or some other workplace plan. And that’s great — except, depending on your future income, you could face weighty tax bills in the future, when you start withdrawals. Meanwhile, your tax-free bucket — which holds Roth accounts, most municipal bonds and properly structured cash-value life insurance — is likely lacking.


    By converting some of the money in your tax-deferred bucket to your tax-free bucket, you can even things up. Yes, you’ll pay taxes now on the money you move, but with today’s lower tax rates, the bite might not be nearly as bad as it could be later. And in exchange, your Roth will give you tax-free growth and withdrawals going forward.

    Final Thoughts

    Your advisers may have preached before about eventually diversifying across all three tax buckets, but with these recent tax reforms, the concept takes on a bit of urgency. There are no limits on how much money you can move to a Roth IRA each year, but with careful planning you can avoid bumping yourself into the next tax bracket as you convert those savings. (Retirees also will want to be mindful about what extra withdrawals could do to the cost of Medicare.)

    As a member of Ed Slott’s Master Elite IRA Advisor Group, I’m always trying to help people create tax-efficient strategies with their retirement income savings. Looking at a Roth conversion now is just one more way to do that. Take some time, do the math and see if it fits with your plan.

    SEE ALSO: 3 Ways to Benefit from a Roth IRA Under New Tax Law, Including a ‘Mega Backdoor Roth’

    Kim Franke-Folstad contributed to this article.


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    Kristian L. Finfrock is the founder of and a financial adviser at Retirement Income Strategies. He is an Investment Adviser Representative of Kalos Capital and a licensed insurance professional. He resides in Evansville, Wisconsin, with his two daughters.

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