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What to know before doing a Roth conversion

Posted at 5:22 PM, Apr 19, 2018
and last updated 2018-04-20 10:59:00-04

Many people are not familiar with what Roth conversions exactly are.

Carl Carlson, CEO of Carlson Financial said a Roth conversion is moving money from a traditional IRA or other tax-deferred account, into a Roth IRA account. The implication is that any amount you move will be treated as taxable income in the year that you move it. The benefit is that once in a Roth, future withdrawals will be tax-free.

This conversion might make sense for someone expecting to be in a higher tax bracket down the road, either from making more money or losing some deductions or write-offs.

Both scenarios apply to a lot of retirees, especially when they have to start taking RMDs at 70.5. Even for someone whose future tax bracket is less predictable, it may still make sense to have some “tax-diversification” if the tax they will pay today isn’t too high and they can afford to pay the tax out of non-retirement accounts, Carlson said.

It is not very easy to determine if you should do a Roth conversion Carlson said to get help!

The change should not be done lightly and should be done with the help of a financial planner and CPA, especially now. Prior to the Tax Cuts and Jobs Act, it was possible to re-characterize or “undo” Roth conversions. Going forward, that option is not available so it’s very important to get right the first time, according to Carlson.

If you decide to do a Roth conversion some strategies they should consider are doing it at the beginning of the year since the stock market goes up more often than it goes down, it makes sense to get the growth tax free.

If we see a big dip in the market that is a also great time to convert so that the growth back all comes tax free.

Now that Roth conversions cannot be undone, it might make more sense to employ different strategies for converting during the year, or even waiting until the end of the year when that year’s income/expenses are more predictable.  Carlson said this is why it is so important to map out your financial future now so that you know what you should do and then you can wait and strike when the iron is hot!