Should I convert my IRA to a Roth IRA?

What is a ROTH IRA?

A Roth IRA is an individual retirement account in the United States that is funded with after-tax dollars and allows tax-free withdrawals after retirement. Contributions are not deductible on one’s tax return, but earnings can be withdrawn tax-free upon reaching age 59½ or upon becoming disabled or after the death of the account holder, provided the account has been open for at least five years.

What are the Benefits of a ROTH IRA?

1. Tax-Free Earnings: Contributions made to a Roth IRA are made with after-tax dollars, meaning that you do not receive a tax deduction. However, the money in your Roth IRA grows tax-free, so you don’t pay taxes on your earnings when you make a withdrawal in retirement.

2. Flexible Contributions and Tax-Free Withdrawals: You can make contributions to your Roth IRA at any time, and you can withdraw your contributions (not gains) without paying taxes or penalties, conversions that are not aged for 5 years and if you are not 59 1/2 will face a penalty for withdrawals.

3. No Required Minimum Distributions: Unlike other retirement accounts, Roth IRAs do not require you to take a minimum distribution at a certain age. This allows you to keep your money in the Roth IRA for as long as you want (unless you need it for something else).

4. Inheritance Benefits: If you leave your Roth IRA to your beneficiaries, they can continue to use the funds for retirement and don’t have to pay taxes on the earnings.

What should be considered when deciding to convert a traditional IRA to a Roth IRA?

1. Current Tax Rate: The most important factor to consider when deciding whether to convert a traditional IRA to a Roth IRA is your current tax rate. If you expect your tax rate to be higher in the future, it may make sense to convert now and pay taxes on the amount converted at your current rate.

2. Investment Time Horizon: If you are planning to retire soon, converting to a Roth IRA may not be the best option since you may not have enough time to benefit from the tax-free earnings, converted accounts need to be aged for 5 years to not pay taxes or penalties on withdrawals.

3. Investment Objectives: If you are looking to maximize your retirement cash flow, converting to a Roth IRA may be a good idea since you won’t have to pay taxes on your earnings when you withdraw them in retirement.

4. Income Limits: There are income limits for contributing to a Roth IRA, and if you are above the limit, you may not be able to contribute. If you are above the income limit, converting to a Roth IRA may be the only way to take advantage of the tax-free earnings.

What is a back door Roth?

A back door Roth is a way to contribute to a Roth IRA even if your income exceeds the Roth IRA income limits. It involves making a non-deductible contribution to a Traditional IRA and then immediately converting it to a Roth IRA. Since the money in the Traditional IRA was contributed with after-tax dollars, the conversion is not taxable, and the account holder can then enjoy the tax-free growth of a Roth IRA.

What are the disadvantages of converting an IRA to a Roth IRA?

1. Tax Liability(cost): Converting to a Roth IRA will result in a tax liability since taxes must be paid on the amount converted. This can be a significant amount, especially if you are converting a large amount from your traditional IRA.

2. Contribution Limits: The maximum contribution is relatively low, you will need other investment vehicles to save enough for retirement.

3. Loss of Deductions: Any contributions you made to a traditional IRA are no longer tax-deductible, so you will lose out on any tax savings you would have received.

4. Early Withdrawals: If you make a withdrawal from a Roth IRA before you reach age 59 ½, you may be subject to taxes and penalties

What is the process for converting a traditional IRA to a Roth IRA?

1. Choose a Roth IRA: The first step to converting a traditional IRA to a Roth IRA is to choose a Roth IRA provider. You can open a new Roth IRA or transfer your existing traditional IRA to an existing Roth IRA.

2. Open an Account: Once you have chosen a Roth IRA provider, you will need to open an account. You will have to provide your personal information and make an initial deposit.

3. Make the Conversion: Once your account is open, you will need to make the conversion. You will need to fill out the appropriate paperwork and specify the amount you want to convert from your traditional IRA to your Roth IRA.

4. Pay Taxes on the Conversion: Any amount you convert from a traditional IRA to a Roth IRA is subject to taxes. You will need to pay taxes on the amount you convert in the year you make the conversion.

5. Monitor Your Account: Once you have converted your traditional IRA to a Roth IRA, you will need to monitor your account. You will need to make sure that all contributions and withdrawals are in accordance with the rules and regulations of the Roth IRA.

If you are looking for a way to maximize your cash flow in retirement, then converting your traditional IRA to a Roth IRA to produce tax-free income is a no-brainer. The view that tax rates are going up in the future is widely accepted ( all the tax deductions from the 2017 TCJA are set to expire at the end of 2025), so at conversion, you are potentially paying a lower tax rate now and creating tax-free cash flow for retirement. Additionally, the removal of required minimum distributions puts you in control of when you access your savings. So, what stops most from converting? The biggest deterrent for converting an IRA to ROTH IRA is the tax liability that is created from conversion, you will need the cash to pay the IRS in the year of conversion. Invito Energy Partners can help you eliminate or substantially lower the tax liability, allowing you to reap all the benefits of a Roth IRA conversion. Don’t miss out on this amazing opportunity, contact us today to learn more.