Gary W. Pelletier, CLU, ChFC, AIF®

Northeast Planning Associates, Inc.

Corporate, Estate

& Financial Planning


Timing for a Roth IRA Conversion

| March 26, 2020
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A Roth conversion can be a great way to move retirement savings from tax-deferred vehicles to a Roth IRA, where withdrawals on the earnings are not subject to income tax.  The “cost” of the conversion is fairly simple:  income taxes are due on the value of the tax-deferred account at the time of conversion.  So when is a good time to look more closely at a Roth Conversion?

During periods of market volatility, like we have experienced in February and March of 2020, the value of a Traditional IRA has likely decreased.  Most people who are good candidates for a Roth Conversion are several years from needing access to these funds, so likely short-term market declines may not impact their financial plan or their retirement sustainability. 

But converting a reduced value to a Roth IRA can potentially lower their tax liability compared to performing the conversion at another time, when the value of the account is higher.  Conversions can also be done in-kind.  This means that the retirement savings can remain invested, without fear of missing a potential recovery, while capturing the future tax benefit of the Roth IRA.

It also may make sense to look more closely at Roth conversions in the window between retirement and when taxable income may increase due to Social Security, Pension and/or Required Minimum Distributions.  This is a period when taxable income may be much lower than in working years, and if so any taxable income from the conversion would be taxed at lower rates than just a year or two prior.  Again, reducing the cost of the Roth conversion (i.e. the tax liability) is the name of the game.  The entire tax-deferred account also does not have to be converted all at once.  Your tax advisor can assist you with determining an appropriate amount to convert each year.

Whether during periods of stock market volatility or when tax rates are much lower, the strategy of Roth conversions may deserve a second look.

This information is not intended as tax, legal, investment, or retirement advice or recommendations. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

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