Improving lives through sound financial planning.

Financial Planning Insight on Roth IRA Conversions

by Robert W. Tull | May 19, 2020 | Financial Planning, Retirement Planning

Hi Robin Tull here with Tull Financial Group. We had a lot of good comments about some of the planning tips we’ve shared over the last three weeks since this virus has occurred. Today I want to talk a bit about the Roth conversion option. You can contribute to a Roth itself, but there are some people who had not been able to because of their income. So, we call this the Roth conversion option. Now, why would you want to do this? If you have a traditional IRA and you think you’re going to be in a projected higher tax bracket when you retire, then converting now and paying the taxes may be an opportunity. The second reason you might do it is if you say “look I’m really not going to use this money, I’m going to leave it to my children” then pay the tax now and then it’s significantly tax deferred for years and years to come. Thirdly, if you’re thinking “well you know I’m going to have a very low income this year – unusually low income this year – then I can pay the tax this year at the lower bracket and the next year I won’t convert.” For the recent market drop that we’ve had, there’s people who we’ve talked to who are thinking “OK, the traditional IRA is down in value – why don’t I convert it to a Roth, pay the tax at this lower rate, and then when it comes back I will never have to pay taxes on it again?”

Now, why would you not do it? I think the first one would be if you’re getting ready to retire, you’re not going to have time to make up for paying that income tax. Secondly, by having that big income in that year that you convert, Medicare will be affected, Social Security is going to be affected. So that would be the second reason; another reason is maybe you just didn’t have the money to pay that tax on this conversion, maybe you needed to have it in another taxable account, then you wouldn’t want to do that for sure.

I find that my older clients are using their IRAs to make charitable gifts through this qualified charitable deduction (QCD). It allows them, if they can’t itemize, to make a charitable gift above the line and get the benefit. So, if you’re going to do that in retirement, then no, Roth is not that opportunity.

In summary here remember you don’t have to convert right away. You can have a five-year plan or a 10-year plan to convert. Remember that once you convert, you can’t re-characterize it back to the traditional IRA, and finally make sure you’ve got the money to pay the tax.

If you like some of these things we’ve been talking about and you have some questions for future topics – let us know, make some comments, give us some feedback. We would greatly appreciate it. Since we talked about tax topics, I urge you to go see your CPA, see your tax preparer, run these ideas by them. If you have a certified financial planner, talk to them. And if you don’t, we would welcome the opportunity to speak to you and meet with you. Have a great day!