A Roth conversion is the process of moving traditional IRA dollars, which are taxed when withdrawn, to a Roth IRA which can be withdrawn tax free.
Benefits of a Roth conversion
- Tax-free income in retirement
- Ability to pass assets tax-free to heirs
- Lower Required Minimum Distribution (RMD)
For example, you have a traditional IRA with a $100,000 balance as of 12/31 in 2021 and you turn 72 in 2022. Your RMD for 2022 would be roughly $3,600. But let’s say that you gradually converted half of those funds to a Roth IRA before turning 72. This would mean that $50,000 would be subject to the RMD and your required distribution in 2022 would only be about $1,800.
Important things to keep in mind when considering a conversion
- The conversion amount will be taxable in the year completed
- Roth conversions are allowed at any income level even if your income is too high for Roth contributions
- Conversions do not have a limit to how often or for how much
- Early distributions may be subject to a tax penalty
Please reach out to Journey Tree or your tax professional if you have questions.