The timing of the conversion of retirement assets to a Roth IRA can make a big difference to your taxes – and to your financial life.

Roth IRAs and Conversions – Background

As many, perhaps most of you, may already know:

• • Contributions to Roth IRAs, whether regularly scheduled or made via conversion, are made with after-tax dollars.
  • If you convert a traditional IRA, Simplified Employee Pension Plan (SEP), or Savings Inventive Match Plan for Employees (SIMPLE) IRAs, funded with pre-tax dollars, to a Roth IRA, you are liable for federal and state income taxes on the amount converted
  • Distributions from a Roth IRA, if taken after age 59½, providing the assets have been held for at least 5 years in that Roth account, are free from federal and state income tax liability. However, contributions made to a Roth IRA after you reach age 59½ are not subject to the 5 year holding rule.
  • The Setting Every Community Up For Retirement Enhancement (SECURE) Act of 2019 and SECURE 2.0, enacted in 2022, allow you to continue contributing to your IRA, traditional or Roth as long as you are working and earning income.
  • There are no required minimum distributions (RMDs) for the original Roth account owner; therefore, your assets can continue to grow after retirement tax free.
  • If you choose not to take any distributions from your Roth IRA, your heirs can inherit the account, and the tax-free distribution rules still apply. However, non-spouse beneficiaries of all IRAs inherited in 2020 or later must take distribution of the full amount inherited within 10 years from the original account owner’s death.
  • While there are income limits governing who can open and contribute to a Roth IRA (for 2024, single filers must earn less than $161,000, and married joint filers must earn less than $240,000), there’s no income limit concerning conversion of existing retirement assets.
  • For 2024, the amount of new contributions to any IRA, traditional or Roth, is $7,000 per individual, with a $1,000 catch-up contribution for those over age 50.
  • There’s no limit to the amount of existing retirement assets you can convert to a Roth IRA – however, we recommend you pay the income taxes due with non-retirement assets.

   

  How Does the Timing of a Roth Conversion Affect Your Taxes?

  That’s a question with more than one answer.

  • First, especially for those in their peak earning years, the tax liability on retirement assets effectively converted from pre-tax to after-tax dollars can be a heavy burden. And conversions at any point, if you convert significant assets, may push you into a higher tax bracket, if you aren’t already in the highest bracket. Or it may trigger an alternative minimum tax (AMT) liability.
  • The other side of this coin is that the distributions are free of federal or state income tax.

   

  How Do You Ensure You are Converting to a Roth IRA at the Right Time?

  The answer is, as so often, plan ahead! I’ve said it before, and it bears repeating: proper prior planning prevents poor performance (try saying that six times fast!).

  You can only start planning from where you are now, but, though it’s never too early, it’s also never too late to make the most out of the opportunities available to you.

  Roth conversions, as we see, need to be made in light of a number important factors. This is a nuanced and individuated decision which needs to be made according to IRS rules. We strongly urge you to consult with your Virtual CFO or trusted financial advisor, who understands your unique financial situation, goals, and perspective – and can tailor a conversion plan (if that’s the best idea for you) which takes into account every aspect which applies, and/or is important, to you.

  Here’s another favorite motto of mine – one size never fits all.

  If you are considering converting existing retirement assets to a Roth account, please click here to email me directly – helping you is my job – and I love doing it!

  Until next time –

  Peace,

  Eric

  For more on Roth accounts and conversions, check out:

  Roth IRAs and Income Tax Liability – How to Protect Your Assets

  SECURE 2.0 Enacted – Key Highlights

  Payout Rules for Beneficiaries of Inherited IRAs

  Roth IRAs – To Convert, or Not to Convert?

  The SECURE Act of 2019