https://retirementplanningscottsdale.com/2019/12/27/anil-vazirani-scottsdale-investment-advisor-shares-key-considerations-when-converting-iras-to-roth-iras/ Anil Vazirani Scottsdale Investment Advisor shares Key Considerations When Converting IRAs to Roth IRAs
Per an article featured recently in Wealth Management, it states that 2019 will come to an end soon, and unless you act quickly you may have lost another opportunity to save taxes over the long term by converting a portion of your IRAs to Roth IRAs.
The cost of the conversion is immediate but, usually, relatively small when compared with the prospective benefits. Yet, there are a few things to think about before you make the move.
The primary reason behind the conversion is that the amount converted will (hopefully) be taxed at a lower rate now than it would be in the future. That prospective higher future tax rate could come from a change in the tax laws that would raise taxpayers’ income tax rates. But more likely is that your income will be higher in the future, especially due to currently deferred Social Security and pension payments.
Paying a little in taxes now to save a lot later isn’t the only benefit of converting IRAs to Roth IRAs. The future earnings on the account will still be sheltered from taxation, but any future distributions from the Roth IRA will be tax-free.
Another bonus of the conversion is that IRA owners who convert can allow their beneficiaries to inherit a prefunded Roth IRA.
Again, the best time to make the conversion is a year in which the tax rate on the conversion is likely to be lower than the rate at which future withdrawals would be taxed. Often that situation occurs right after a client retires but before she starts receiving Social Security (and any pension) payments. Ideally the client would have assets held outside of tax-sheltered accounts that can be tapped to cover living expenses, allowing all distributions from the IRA to be rolled into the Roth IRA.
For most middle-income (and moderate-spending) account holders, the key figure to convert from IRAs to Roth IRAs in a given year is an amount that will still keep their taxable income below the top of the 12% federal income tax bracket. For 2019, that figure is $39,475 for a single filer and $78,950 for married couples filing jointly. Anything over those amounts is taxed at 22% by the feds until the figures rise to $84,200 and $168,400 respectively, when the rate inches up to 24%.
Consequences to Consider
Adding extra income to your 1040 could trigger some extra costs, beyond the taxes.
First, if you receive Social Security retirement benefits, the extra income could make the Social Security taxable, or make more of it taxable than it would be without the conversion. Also, the extra taxable income could drive long-term capital gains realized during 2019 from 0% taxation at the federal level up to 15% in a hurry. Those who currently qualify for subsidized health insurance premiums under the Affordable Care Act may lose the subsidy if their income is too high. Or Medicare recipients could see an increase in premiums during future years from an excess of income taken this year. Even after these factors have been considered, you may want to wait to make any conversions until any mutual funds held in unsheltered accounts distribute all of their year-end dividends and capital gains.
The calculations require more precision than before. Unlike previous years, now you can’t “recharacterize” (i.e., “undo”) conversions made in 2019 before the following April 15. Therefore, once the clock strikes midnight on Dec. 31, 2019, the amount converted is permanently counted as taxable income.
Considering how narrow the window of opportunity may be, you may want to start talking about your accounts now. Dial 1-800-957-5604 x 200 and set up a complimentary strategy session to understand what your goals are, understand what objective you’re trying to accomplish, your risk tolerance, and let us show you how to reduce your investment fees from stocks, bonds and mutual funds down to one point, or five percent when you work with our investment advisory platform. Dial 1-800-957-5604 x 200, and on the web at: DreamRetire.com
For more information: https://www.wealthmanagement.com/retirement-planning/key-considerations-when-converting-iras-roth-iras
Anil Vazirani is president of Secured Financial Solutions, independent insurance advisor investment advisor rep with a fiduciary obligation and in the financial services industry since 1994. A+ rating with the Better Business Bureau for over a decade and a half, members in good standing with the National Association of Insurance and Financial Advisors.
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