Financial Advisor Insights

Evaluate a Roth Conversion

by Kristin McKenna, CFP® on April 20, 2016 in Infographics

Evaluate a Roth IRA Conversion (Infographic)

401(k) Rollover to Roth IRA

A Roth IRA can offer many unique benefits, but a complete analysis should be done prior to the Roth conversion. Some of the key retirement planning considerations are:

  • Do I expect my tax bracket to be higher in retirement than it is now?
  • Do I have non-retirement funds available to pay the tax due upon conversion?
  • Does a Roth IRA conversion fit into my overall retirement planning and wealth strategy?  

If you anticipate your tax bracket being higher in retirement due to required minimum distributions or other sources of income, then it may make sense to pay income tax now while you are in a lower tax bracket. A main reason an individual will decide not to initiate a Roth IRA rollover is cash flow: it typically does not make sense to convert to a Roth if you need to use retirement funds to pay the tax due.

Finally, consider whether a Roth fits into your overall retirement planning strategy. An isolated conversion of relatively small dollar value may not make a material impact on your overall wealth. A financial plan can help you weigh whether maintaining tax-deferred growth is a better strategy to maximize your wealth. To learn more about a 401(k) to Roth IRA rollover and other options for your old 401(k) retirement plan, click here. 

Converting a Traditional IRA to a Roth IRA

The extent to which a Roth conversion will benefit an individual is unique to their situation. Often, a Roth will provide greater benefits to those who have significant assets in retirement. For example, those who rely on regular withdrawals for support do not gain from the ability to avoid required minimum distributions. Some reasons why it may be beneficial to convert an IRA to a Roth.

  • No RMDs – unlike IRAs and qualified retirement plans, a Roth IRA is unique in that required minimum distributions are not required during the original account owner’s lifetime.
  • Tax-efficient legacy gifts – a Roth IRA is an advantageous way to leave assets to beneficiaries, as the account will pass onto an heir income tax-free, assuming a five-year holding period has been met by the decedent. (Note: Roth IRAs may still be subject to estate tax)
  • Diversification – recall the earlier discussion on retirees facing higher income tax brackets due to RMDs. A Roth can provide needed diversification and flexibility to develop a strategy for tax-efficient withdrawals in retirement.
  • Tax-free earnings – assuming age and holding period requirements are met, withdrawals will be tax-free.

To learn more about converting an IRA to a Roth IRA, click here. 

Whether you're considering a 401(k) rollover to a Roth IRA or converting a traditional IRA to a Roth, first understand the tax implications. It can be a great strategy, but it isn't right for everyone. Contact us to discuss a Roth conversion with our retirement investment advisors today.

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