What is a Roth conversion?
A Roth conversion involves transferring assets from a pre-tax retirement account, such as a Traditional IRA or 401(k), SEP IRA, or SIMPLE IRA into a Roth IRA or Roth 401(k).
What are the income limits for Roth conversions?
There are no income limits for conducting a Roth conversion. This means you can convert funds from a Traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA, regardless of your income level. However, there are still income limits for Roth IRA contributions, which differ from conversions.
It’s easy to mistake Roth conversions for Roth contributions. While there are limits to how much you can CONTRIBUTE to a Roth IRA each year, there is no limit to how much you can CONVERT to a Roth IRA.
What taxes are involved in a Roth conversion?
When you convert funds from a pre-tax retirement account (e.g., Traditional IRA) into a Roth IRA, you will owe taxes on the converted amount. The taxes are based on your ordinary income tax rate for the year of the conversion. If you made any nondeductible contributions to your Traditional IRA, a portion of the conversion will be tax-free as long as you properly tracked your “basis.”
What are some Roth conversion strategies for retirees?
Retirees can benefit from several Roth conversion strategies. One popular strategy involves converting during years when your taxable income is low (a.k.a. “gap years”), which may help minimize the taxes paid on the conversion. Another strategy is converting funds gradually over several years, spreading the tax liability. In summary, retirees should consider a Roth conversion if they expect to be in a higher tax bracket in the future.
What is a Roth conversion ladder?
A Roth conversion ladder is a strategy for converting Traditional IRA funds to a Roth IRA over several years. This approach enables you to potentially access your retirement savings in the future without incurring a penalty or paying higher taxes. By spacing out conversions and following the 5-year rules, you create a sequence of balances that can be withdrawn tax-free and penalty-free. This strategy can be especially useful for those who wish to access their funds before age 59½.
Can I convert IRA to Roth after age 60 without penalty?
Yes, you can convert a Traditional IRA to a Roth IRA after age 60 without incurring a penalty. The 10% early withdrawal penalty does not apply to Roth conversions since they are not considered distributions. However, you will still owe taxes on the converted amount based on your ordinary income tax rate.
What is the main disadvantage of converting to a Roth IRA?
The primary disadvantage of converting to a Roth IRA is the taxes owed on the conversion. When you convert funds from a Traditional IRA to a Roth IRA, you must pay taxes on the converted amount at your ordinary income tax rate. This tax burden may be substantial depending on the amount converted and your tax bracket. It’s essential to weigh the potential benefits of tax-free withdrawals against the upfront tax liability before making a decision to convert.
