A Roth conversion involves transferring funds from a retirement account, which is taxed upon withdrawal, to a Roth IRA, where withdrawals may be taken tax-free in retirement. People who have primarily invested in a Traditional IRA and haven’t contributed much to a Roth IRA might find it beneficial to convert some Traditional IRA funds to a Roth IRA.

3 Benefits of a Roth Conversion

  1. Tax-free income in retirement
  2. Passing assets to heirs tax-free
  3. Lower required minimum distribution (RMD)

To further explain #3, let’s look at an example. Say you have a Traditional IRA with a $100,000 balance as of 12/31/23, and you turn 73 in 2024. That means that your RMD for 2024 would be roughly $3,800.

However, if you gradually converted half those funds to a Roth IRA before turning 73, only $50,000 would be subject to the RMD. Your required distribution in 2024 would be about $1,900. This could help your IRA last longer, while continuing to grow, and it might help reduce your taxable income.

Important Considerations for Roth Conversions

  • The amount converted to a Roth IRA is taxable in the year the conversion is completed.
  • Roth conversions are allowed at any income level even if your income exceeds the limits for Roth IRA contributions.
  • There are no limits on how often or how much you can convert.
  • Early distributions of converted funds may be subject to penalties.

While Roth IRA conversions may not be right for everyone, we have found many of our clients have seen significant financial benefit from converting some of their Traditional IRA funds into Roth IRA funds prior to retirement.

 

HOW MIGHT A ROTH IRA CONVERSION BENEFIT YOU?

LET’S TALK

 

You may also enjoy: