The process of converting to a Roth IRA may seem like a daunting task to accomplish on your own. There are numerous rules, regulations, and options available. Despite the challenges, the reward of enjoying tax-free withdrawals in retirement may mean that IRA to Roth conversion is the best option for you.
A Roth conversion, simply put, is moving assets from a qualifying retirement plan into a Roth IRA. There are a couple of ways to accomplish this. One is by rolling over assets from the previous IRA directly into a Roth IRA via a financial institution. The other option is that the IRA owner can withdraw and distribute assets from their current plan into the Roth IRA themselves, so long as they do so within 60 days of receiving the distribution. Regardless of which option you choose, the process is heavily regulated due to the significant tax implications. All conversions should be overseen by a tax professional.
Tax brackets and time until retirement are the most important considerations when deciding if a Roth conversion is your best option.
With individual tax brackets shrinking, you may foresee shifting into a higher tax bracket after retirement. By making a Roth conversion, you won't pay any taxes when you're ready to withdraw. Though it can be burdensome to pay taxes upfront, it can mean significant savings later.
If you decide to convert to a Roth IRA, the money must stay in that account for a minimum of five years. Withdrawing early will result in a 10% penalty and additional income taxes. That means for an IRA to be beneficial, you must have adequate time available before retirement.
The following are frequently asked questions regarding the rules for Roth IRA conversions:
How many Roth conversions are allowed per year?
There are no limits to how many conversions you can make per year. In some cases, a multi-year Roth conversion plan may be the best option.
How can I estimate my tax liability on an IRA conversion?
The funds transferred during a Roth IRA conversion will be taxed as income for the year and possibly subject to higher tax brackets. It's best to consult a tax professional to accurately estimate your liability.
When can I start utilizing a Roth IRA?
You must wait five years after your first contribution before withdrawing your earnings. The five-year period begins on the first day of the tax year you contributed to the Roth IRA.
Are there income limits on Roth conversions?
No, anyone is eligible to convert regardless of their income or tax filing status.
What types of retirement accounts can be converted into Roth IRAs?
Traditional, SIMPLE and SEP IRAs, as well as some 401(k) plans.
Have more questions? Don't navigate this difficult process alone. Let us help you to better understand all of your options, to find out more about the Roth IRA conversion process and if it is the right fit for your financial needs.