The question of how to convert to a Roth IRA is one of the most frequent we receive on CGE and possibly one of the most important to your financial future.
Above all the investment strategies and the search for yield, one method of retirement planning trumps them all… that of tax planning. No other expense takes as much out of your nest egg as taxes, not management fees and not even market crashes.
That’s why it is so important to plan your retirement savings around taxes, minimizing the amount you pay now and in the future. Until recently, one powerful tax planning investment vehicle was off-limits to a large cross-section of Americans. If you had income just over $100,000 on an adjusted basis, you couldn’t take advantage of the financial benefits provided by one of the best tax planning strategies.
A change in the tax law has opened up a loophole and everyone can now benefit from the tax strategies available in a Roth IRA. Learn the benefits as well as the rules, and then convert to a Roth IRA to save money and diversify your retirement assets.
Why Should You Convert to a Roth IRA?
A Roth IRA conversion is simply moving retirement assets from a traditional IRA or an employer-sponsored retirement account like a 401k into a Roth retirement account. While you pay no taxes on your contributions to a traditional IRA but are responsible for taxes on withdrawals in retirement, it is exactly the opposite for a Roth IRA. Any money you put into a Roth IRA is after taxes, but your account grows tax-free and you owe no taxes on withdrawals.
Unlike traditional IRAs where you have to begin withdrawals from the account at the age of 70 ½, there are no mandatory withdrawals from a Roth IRA. This makes it a better estate planning tool than traditional accounts. If it turns out you have enough income in retirement, you can pass your Roth IRA assets to heirs completely tax-free.
It makes the most sense to convert to a Roth IRA when you expect to be in the same or a higher tax bracket during retirement. This may sound odd since you likely won’t have much income but it is actually a scenario that plays out often. If you have certain investments like Master Limited Partnerships (MLPs) or other income-producing stocks, you’re taxable income may be somewhat higher when you sell investments. Start your own business later in life and it may mean a stream of taxable income during retirement, pushing your tax rate higher.
The biggest benefit of converting to a Roth IRA is a strategy that most do not even consider. No-one knows exactly what their tax situation is going to look like in retirement and government budgets busting at the seams likely means higher rates in the future. Keeping a portion of your retirement savings in a traditional IRA and converting a portion into a Roth IRA provides the best of both worlds and protects your retirement from any tax scenario. You’ll benefit from the potential to lower taxes now and the tax-deferred growth in your traditional IRA account, while also receiving tax-free income from your Roth IRA account in the future.
Know the Rules to Convert to a Roth IRA
Taking advantage of the benefits to a Roth IRA has not always been available to everyone. Until recently, if you were in higher income brackets, you could neither open a Roth IRA nor convert your traditional IRA to an account. Thanks to a 2010 change to tax laws, anyone can convert to a Roth IRA, though opening and contributing to an account is still limited.
If you didn’t catch the loophole, it’s an extremely important one and worth repeating. Anyone can convert to a Roth IRA even if you are restricted from contributing to an account because of income. Many high-income households have taken advantage of this by opening a traditional IRA account, then converting to a Roth IRA account for a back-door approach to the benefits. A Roth IRA is a powerful tax-saving tool and there is no guarantee that the government will keep the loophole open forever. High-income investors are urged to take advantage of the strategy before the door is closed.
The table below shows the contribution limits to a Roth IRA account. If your income is too high for contributions, you’re only opportunity to take advantage of Roth IRA benefits is through a conversion. If your income is less than the limit shown in the table, you can still benefit by converting to a Roth IRA account, but can also contribute to your account.
Taxes are due on any amount you convert to a Roth IRA; this is fair because you didn’t pay taxes when you contributed to a traditional retirement account. You can use converted funds to help pay taxes but will have to pay a 10% penalty on the funds. This is why it is important to have money set aside to pay taxes out of non-IRA assets. As long as you move your traditional IRA or other accounts directly to a Roth IRA, there is no 10% early withdrawal penalty on the funds.
The IRS allows you to undo your Roth IRA conversion if done before October 15 of the following year, though you will need to refile the prior year’s taxes to figure out the resultant tax change. It’s generally not recommended to re-characterize because of the fees and lost benefits from the Roth IRA.
Penalty-free withdrawals from your Roth IRA are available when you reach 59 ½ years old, become disabled or die. You may also use up to $10,000 over your lifetime to buy a home.
How do I Convert to a Roth IRA?
Retirement planning and investing around the massive number of tax laws keeps a lot of people from taking advantage of the benefits available. Fortunately, converting to a Roth IRA can be surprisingly easy and take less work than you’d expect.
Step 1: Contact a certified Roth IRA conversion specialist at the Certified Gold Exchange (800) 300-0715 to start the conversion process.
Step 2: Conversion specialists at CGE can answer any questions you have on a Roth IRA conversion and open an account. They can also help you fill out any paperwork for the conversion.
Step 3: The amount you convert to a Roth IRA will be taxed as current income, so it is important to plan how much you have available to pay taxes with non-IRA funds. There is no limit to the number of conversions, so you can convert a portion each year depending on how much money you have available to pay the tax liability. You may also want to consider converting only as much as will push your income to the next tax bracket.
Step 4: Your Roth IRA account forms will be mailed or faxed to you. You can call your Roth IRA conversion specialist at any time to answer questions about the conversion.
Step 5: Your Roth IRA is opened once the forms are returned and reviewed.
There is a five-year holding period on each Roth IRA conversion to be eligible for tax-free withdrawals. Most retirement accounts can be converted to a Roth IRA including: SEP IRAs, SARSEP IRAs, SIMPLE IRAs, 401(k) and 403(b).
Certified Gold Exchange is a leader in Roth IRA conversions and investment in precious metals through traditional or Roth IRA accounts. For more than two decades, the company has maintained a focus on exceptional service and holds an A+ rating from the Better Business Bureau. Call your IRA conversion specialist at (800) 300-0715 or visit the website at www.certifiedgoldexchange.com