Articles tagged with: Roth IRA conversions

Why Roth IRA Conversions Can Make Sense in a Down Market

When stocks struggle or tread water, going Roth gains merit.

Converting a traditional IRA to a Roth IRA is no easy decision. After all, it is a taxable event. When the stock market is down or sluggish, however, a Roth conversion has more appeal.

Traditional IRA owners “go Roth” for some very good reasons. A Roth IRA can be a resource for tax-free retirement money. When you are 59½ or older and have owned a Roth IRA for at least five tax years, you can make tax-free withdrawals from your account.1

Original owners of Roth IRAs never have to contend with Required Minimum Distributions (RMDs). They can also contribute to their IRA all their lives, provided they have earned income below a certain ceiling.2,3

In a sense, a Roth IRA functions as a tax management tool in retirement; you can put just about any investment subject to taxable income into a Roth IRA and forego paying taxes on that income in the future.3

Many people retire to a lower tax bracket. That fact alone is a good argument for timing a Roth conversion to coincide with retirement.

For example, say you contribute to a traditional IRA while you are working, all while you are in the 25% federal income tax bracket. Those contributions come with a perk; you may be saving up to 25 cents on every dollar you put into that traditional IRA, because traditional IRA contributions are tax-deductible in many instances. In this scenario, as you retire, you drop into the 15% federal income tax bracket. Making a Roth conversion at this point also comes with a perk: the conversion now costs 15 cents on the dollar instead of 25 cents on the dollar.3

Why is a poor year for stocks an auspicious moment for a Roth conversion? In a beaten-down market, the cost of conversion can be lower for retirees and pre-retirees alike.

As a mock example, suppose you own a traditional IRA that had a balance of $180,000 at the end of last year. You had hoped the bull market would push its value higher this year, but then the market waned, and now your traditional IRA is worth $170,000. Bad news, yes; if you want to “go Roth” with that IRA, though, there is a silver lining. The lower value of your traditional IRA means the tax bill on the conversion (i.e., the tax owed on the distribution of assets out of the traditional IRA) will be slightly lower. Additionally, when the market rallies in the future, you get growth in a Roth IRA with the potential for tax-free withdrawals, rather than growth in a traditional IRA where withdrawals will be taxed as regular income.4

Other financial factors can make a Roth conversion opportune. If you are unemployed, have major health care expenses, or face a net operating loss (NOL), it may also be a good time for this move. Any of these circumstances could leave you in a lower income tax bracket. An NOL, in fact, can offset the taxable income resulting from the conversion.4

If you are retired and in a low income tax bracket and have not yet claimed Social Security, those three factors may put you in a nice position for a Roth conversion.

A Roth conversion need not be all-or-nothing. Some traditional IRA owners opt for partial conversions; they “go Roth” with just a portion of their traditional IRA funds. A Roth conversion can even be recharacterized; that is, undone. If you want to undo a Roth conversion, in most cases, you have until October 15 of the following tax year to do so.5

When is a Roth conversion a bad idea? A few scenarios come to mind. One, you lack the ability to pay the income tax resulting from the conversion. Two, you are positive that you will be in a lower tax bracket than you are now when you start taking RMDs from your traditional IRA. Three, you have plans to relocate to a state with minimal or no state income tax. Four, you think you might make a major charitable IRA gift either at or before your death. Five, you are in your peak earning years and, correspondingly, in the highest tax bracket of your lifetime.

A Roth conversion is not for everyone, but it could be for you. The short-term tax hit may be a small price to pay for the potential benefits ahead. If you want to explore this move, by all means, talk with a tax or financial professional first. That conversation is essential.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – nerdwallet.com/blog/investing/know-rules-before-you-dip-into-roth-ira/ [1/29/16]
2 – irs.gov/Retirement-Plans/Roth-IRAs [12/17/15]
3 – time.com/money/4277306/how-to-contribute-to-a-roth-ira-if-youre-retired/ [4/4/16]
4 – usatoday.com/story/money/columnist/powell/2015/12/19/time-consider-roth-ira-conversion/75152514/ [12/19/15]
5 – irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Recharacterization-of-Roth-Rollovers-and-Conversions [7/14/15]

An Alert for People Who Use CDs for Their IRAs

A recent tax court ruling now limits the frequency of IRA rollovers.

Do you like to shop around online for the best CD rates? Do you have a habit of moving certificates of deposit from bank to bank in pursuit of better yields? If you do, you should be aware of an obscure but important IRS decision, one that could directly impact any IRA CDs you own.

Pay attention to the new, tighter restrictions on 60-day IRA rollovers. This is when you take possession of some or all of the assets from a traditional IRA you own and deposit them into another traditional IRA (or for that matter, the same traditional IRA) within 60 days. By making this tax-savvy move, you exclude the amount of the IRA distribution from your gross income.1

For decades, the IRS had a rule prohibiting multiple tax-free rollovers from the same traditional IRA within a 12-month period. For example, an individual couldn’t make an IRA-to-IRA rollover in November and then do another one in March of the following year using the same IRA.1

This didn’t present much of a dilemma for people who owned more than one IRA, of course. If they owned five traditional IRAs, they could potentially make five such tax-free rollovers in a 12-month period, one per each IRA. Internal Revenue Code Section 408(d)(3) allowed that.1,2

Those days are over. Thanks to a 2014 U.S. Tax Court ruling (Bobrow v. Commissioner, T.C. Memo. 2014-21), the once-a-year rollover restriction will apply to all IRAs owned by an individual starting January 1, 2015. This year, you’ll be able to make a maximum of one tax-free IRA-to-IRA rollover, regardless of how many IRAs you own.1

If you have multiple IRA CDs maturing, you could risk breaking the new IRS rule. When a CD matures, what happens? Your bank cuts you a check, and you reinvest or redeposit the money.

When this happens with an IRA CD, your goal is to make that tax-free IRA-to-IRA rollover within 60 days. In accepting the check from the bank, you touch those IRA assets. If you fail to roll them over by the 60-day deadline, those IRA assets in your possession constitute taxable income.3

So if the new rules say you can only make one tax-free IRA-to-IRA rollover every 12 months, what happens if you have three IRA CDs maturing in 2015? What happens with the two IRA CDs where you can’t make a tax-exempt rollover?

Here is how things could play out for you. You could end up with much more taxable income than you anticipate: the money leaving the two other IRA CDs would constitute IRA distributions and be included in your gross income. If you are not yet age 59½, you could also be hit with the 10% penalty on early IRA withdrawals.3,4

Is there a way out of this dilemma? Yes. This new IRS rule doesn’t apply to trustee-to-trustee transfers of IRA assets. A trustee-to-trustee transfer is when the financial company hosting your IRA arranges a payment directly from your IRA to either another IRA or another type of retirement plan. So as long as the bank (or brokerage) serving as the custodian of your IRA CD arranges such a transfer, no taxable event will occur.3

Speaking of things that won’t change in 2015, two very nice allowances will remain in place for IRA owners. You will still be able to make an unlimited amount of trustee-to-trustee transfers between IRAs in a year, as well as an unlimited number of Roth IRA conversions per year.1

Mike Moffitt may be reached at ph. 641-782-5577 or mikem@cfgiowa.com.

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion form a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.   

Citations.

1 – irs.gov/Retirement-Plans/IRA-One-Rollover-Per-Year-Rule [5/14/14]

2 – bna.com/announcement-clarifies-inconsistency-b17179889881/ [4/24/14]

3 – irs.gov/Retirement-Plans/Plan-Participant,-Employee/Rollovers-of-Retirement-Plan-and-IRA-Distributions [4/21/14]

4 – bankrate.com/financing/cd-rates/cd-ira-owners-beware-of-new-rule/ [9/2/14]