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Roth Conversions - 

Is the Timing Right?

By Dave Verbeke, Financial Advisor

Recent tax law changes have reduced the marginal rate in most tax brackets by 2%. Could this be the opportune time to convert some of your money from a pretax IRA to a Roth (after tax) IRA. The answer is “maybe.” When you convert pretax money to a Roth IRA, you pay the income tax now instead of later. In exchange for paying taxes now, all distributions and earnings in the Roth account are tax free. What are some factors to consider?


What is your tax rate and adjusted gross income? Let’s say your income is $170,000 for a married filing jointly couple. The current tax rate is 24% for federal. That 24% rate goes up to $315,000, so you could take some taxable income out of your IRA without hitting a higher tax rate. This is called bracket filling and it helps you manage the amount of taxable income you have each year. Your accountant and your financial advisor can run the numbers to see if this would work for you.


Do you have the money to pay the additional taxes? If you’ve been getting a large refund or have some excess cash earning minimal interest in a bank account, it might make sense to pay the taxes now for the benefit of years of tax free growth. The general rule of thumb is that the account would need to grow for about 10 years in order to break even. This makes the Roth conversion a topic to discuss for clients in their late 50’s and early 60’s.


Does your 401k plan offer a Roth option? Changing your 401k contributions from pretax to Roth is a painless way to help diversify your retirement income sources. By switching now, you can use the last years of your career to increase tax free money available to you in retirement. Roth contributions aren’t subject to a required minimum distribution at age 70½. This allows the investment to stay in the account longer and grow for the later years of retirement and doesn’t affect the cost of your Medicare premiums.