ROTH Conversions Revisited
Now that the superior beings in DC have finally made a permanent decision – at least for the next two years – on the rates at which they will confiscate our money, maybe we should reconsider the advantages converting taxable IRAs to nontaxable Roth IRAs. You should be aware that my position is that it is an unforgivable sin to pay any more tax than you absolutely have to, or pay it any earlier than the due date. However, if (1) your top tax rate is always the same, (2) you have cash outside of retirement plans you can use to pay the additional tax on the conversion, and (3) you are not dependent on IRA distributions for living costs, then you might consider making a conversion in an amount that will not cause any income to be taxed at a higher rate.
Some advantages of converting a regular IRA to a Roth IRA are:
- Withdrawals up to the conversion value and contributions, are nontaxable if you are over 59.5
- All withdrawals are nontaxable after account is 5 years old
- Nontaxability applies to beneficiaries if named in IRA agreement
- Lack of income from investment of funds used to pay taxes reduces current taxes
- Reduces estate value by amount of taxes paid
- Income tax on future Roth IRA earnings is eliminated
- You can take until October 15 to file your tax return and make your final decision (do it by 10/1)
- You can open multiple Roth IRAs and decide whether to back out on each one separately before you file your tax return. You pay taxes on the ones you don’t back out on.
Some disadvantages are:
- Reduces deductions due to increased adjusted gross income, e.g. medical
- May increase Medicare premiums (currently based on adjusted gross income)
- May increase amount of Social Security taxable
- Reduces income from investment of funds used to pay taxes
So I can still change my mind even about paying taxes. Talk to your retirement planning advisor—or us.
