Will federal income tax rates ever be lower than they are right now? Given the outlook for Social Security and Medicare, it is hard to imagine them falling much further. Higher federal income taxes could very well be on the horizon, as the tax cuts set by the 2017 reforms are scheduled to sunset when 2025 ends.
Not only that, the federal government is now using a different yardstick, the chained Consumer Price Index, to measure cost-of-living adjustments in the federal tax code. As an effect of this, you could gradually find yourself in a higher tax bracket over time even if tax rates remain where they are, and today’s tax breaks could eventually be worth less.1
So, this may be an ideal time to consider converting a traditional IRA to a Roth. A Roth IRA conversion is a taxable event, and so if you have a traditional IRA, you may be thinking twice about it. If the IRA is large, the taxable income linked to the conversion could be sizable, and you could end up in a higher tax bracket in the year the conversion occurs. For some that literally may be a small price to pay.2
The jump in your taxable income for the year of the conversion may be a headache – but like many headaches, it promises to be short-lived. Consider the advantages that could come from transforming a traditional IRA balance into a Roth IRA balance (and remember that any taxpayer can make a Roth conversion, even a taxpayer whose high income rules out the chance of creating a Roth IRA).3
Generally, you can take tax-free withdrawals from a Roth IRA once the Roth IRA has been in existence for five years and you are age 59½ or older. If you end up retiring well before 65 (and that could happen), tax-free and penalty-free Roth IRA income could be very nice.3
You can also contribute to a Roth IRA all your life, provided you earn income and your income level is not so high as to bar these inflows. In contrast, a traditional IRA does not permit contributions after age 70½ and requires annual withdrawals once you reach that age.2
Lastly, a Roth IRA is convenient in terms of estate planning. If IRS rules are followed, Roth IRA heirs may end up with a tax free inheritance.3
A Roth IRA conversion need not be “all or nothing.” Some traditional IRA owners elect to convert just part of their traditional IRA to a Roth, while others choose to convert the entire balance over multiple years, the better to manage the taxable income stemming from the conversions.2
Remember, however, that you can no longer undo a Roth conversion. The Tax Cuts & Jobs Act did away with so-called Roth “recharacterizations” – that is, turning a Roth IRA back to a traditional one. Now, this do-over is no longer allowed.2
Talk to a tax or financial professional as you weigh your decision. While this may seem like a good time to consider a Roth conversion, this move is not suitable for everyone. Occasionally, the resulting tax hit may seem to outweigh the potential long-run advantages. Study the various financial implications before making the move.
Mike Moffitt may be reached at ph# 641-782-5577 or email: firstname.lastname@example.org
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.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in
regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
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.
1 – money.cnn.com/2017/12/20/pf/taxes/tax-cuts-temporary/index.html [12/20/17]
2 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [8/17/18]
3 – fidelity.com/building-savings/learn-about-iras/convert-to-roth [8/27/18]