ROTH IRA Conversions are increasing in popularity lately and with good reason. It can be a great way to avoid taxes in certain situations. While the process is straightforward, there are questions about who may be a good candidate for it.
· Anyone who feels that when they retire, they will have income that puts them in a higher tax bracket than their current bracket. How could that happen? One way is that, when you reach age 72, the IRS requires you to start taking Required Minimum Distributions (RMD). This is a percentage of your money that is required to be taken out of retirement accounts, such as a traditional IRA, in which taxes were deferred. Those withdrawals, when added to your Social Security, pension and any other income you might have, could bump you into a higher tax bracket.
· Anyone between the ages of 60 to 72 who is retired and on a limited income of Social Security. Why the cutoff at age 72? That’s the age you must start taking those required minimum distributions, and IRS rules don’t allow you to convert RMDs to a Roth, so ideally you want to get the job done before you reach that magic age.
· As an example, there is married couple who want to leave the majority of their IRA for their children and want to leave it tax free. By using a ROTH IRA conversion, we are converting that money tax free, bit by bit each year but being careful not to bump them above their 24% tax bracket. The will pay tax on that amount now, but once the funds are in the ROTH, the money can grow tax free.
If you have any questions about this process or are interested in seeing if this strategy make sense for you, please reach out and send me a note. I would love to hear from you and help you out.
Securities America and its representatives do not provide tax advice. Please consult with your tax advisor regarding your specific situation.