Investment corner: Roth conversions- To do, or not to do?

Larry Sidney / Special to the Tribune

The Roth IRA is one of the most powerful wealth-building strategies available, and yet also one of the most misunderstood. Should you have a Roth IRA? Should you put money into your regular IRA, your Roth IRA, or both? Is this a good year for a Roth IRA conversion? These are all common questions, and great questions! And, when understood correctly, they can help you to create wealth for your future.

A Roth IRA is a type of individual retirement account that offers advantages unique from those found in traditional IRAs and 401(k)s. Some of these advantages include:

– Tax-free qualified withdrawals once you hit the applicable age and duration minimums, typically age 59 ½ and a Roth IRA that’s been open for at least 5 years. Dollars withdrawn from your Roth IRA don’t even count as income on your tax return!

– No “required minimum distributions”, or RMDs, which in traditional IRAs typically begin between age 72 and 73 (the exception being inherited Roth IRAs, which typically allow 10 years for distribution). This gives you complete flexibility in terms of using the money in your account once you qualify for withdrawals.

– For Estate Planning, your heirs can inherit the money in your Roth IRA tax free, providing them a valuable financial legacy.

A Roth IRA is also unlike a traditional IRA or 401(k) because contributions to your Roth IRA must be made with after-tax dollars. In essence, by contributing to a Roth IRA you are giving up your tax break now in order to have a (hopefully) larger tax break later on.

Now that you have a sense of what a Roth IRA is, let’s get to the question of when it makes sense to do a Roth conversion. A Roth conversion occurs when you move funds from a traditional retirement account (usually a 401(k) or a traditional IRA) into a Roth IRA. Because your original retirement investment was done pre-tax and a Roth IRA is after-tax, every dollar converted to your Roth counts as earned income in the year of the conversion. In other words, you will pay income taxes this year on any dollars that you convert to your Roth IRA this year.

Roth conversions often make sense when you:

– Expect higher taxes in retirement than you are paying in the current year.

– Have unusually low income for a year or more, so your tax rate on the conversion may be lower than normal.

– Want greater financial flexibility in retirement.

In conclusion, Roth IRAs offer an incredible advantage for those who understand how to leverage them in their retirement planning. If the whole concept seems complicated, that’s because it can be; in fact, we are just scraping the surface here. Take steps to educate yourself before making any decisions, or work with a financial advisor and a tax professional who can

guide you through the process. Remember that each of us has a unique personal and financial situation, so the best decision for one person is not necessarily best for another.

However you choose to save for retirement, invest smartly and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.

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