With the passage of the SECURE Act and the changes to IRA rules, discussion on Roth conversions is heating up. In this show we will talk about why Roth conversions are a hot topic now and also why they do NOT make sense for many people.
If you are considering converting your Traditional IRA to a Roth IRA, listen in to learn more.
TRANSCRIPT:
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The SECURE Act, passed in December 2019, brought several changes to retirement planning rules in the United States. One of the key changes under the SECURE Act is the modification of rules governing traditional IRA contributions and conversions to Roth IRAs. This has left many individuals wondering whether it makes sense for them to do a Roth conversion.
A Roth conversion is the process of moving funds from a traditional IRA to a Roth IRA, which allows for tax-free withdrawals in retirement. Before the SECURE Act, individuals had the option to “recharacterize” a Roth conversion if they later decided it was not in their best interest. However, the SECURE Act eliminated this option, meaning that once a Roth conversion is made, it cannot be undone.
So, should you do a Roth conversion in light of these changes? The answer depends on several factors, including your current income tax bracket, future retirement income expectations, and your estate planning goals.
One of the primary benefits of a Roth conversion is the potential for tax-free withdrawals in retirement. If you expect your income tax bracket to be higher in retirement than it is currently, a Roth conversion may make sense as it allows you to pay taxes on the converted amount at your current rate, potentially saving you money in the long run.
Additionally, Roth IRAs are not subject to Required Minimum Distributions (RMDs) during the account holder’s lifetime, unlike traditional IRAs. This can be advantageous for individuals who do not need to rely on their retirement savings for income and would prefer to leave their accounts untouched for future generations.
On the other hand, if you expect your income tax bracket to be lower in retirement, a Roth conversion may not be the best choice as you would be paying taxes on the converted amount at a higher rate than necessary. Additionally, if you anticipate needing to access your retirement savings before age 59 1/2, a Roth conversion may not be the best option as early withdrawals from a Roth IRA may be subject to penalties.
Ultimately, the decision to do a Roth conversion should be made with careful consideration of your individual financial situation and goals. Consult with a financial advisor or tax professional to determine whether a Roth conversion is the right move for you. Remember, once a Roth conversion is made, it cannot be undone, so it is important to weigh the potential benefits and drawbacks before making a decision.
Awesome advice, Dan!! Really appreciate all your insight!
Awesome advice, Dan!! Really appreciate all your insight!
Also Avoid Medicare 2yr Look Back Fees by doing it before age 63!
Would it have been advantageous to have done a Roth conversion back in March 2020 when the market loss some value? Say the $200,000 in my IRA lost value, say it fell to $150,000. If I did a Roth conversion then the tax burden would have been less but If I stayed in the same fund a short time later it was back to $200,000. Would that make sense.
I own a small business (Subchapter S corp.) that both my wife and I operate. At year end, I could pay tax on the profit when I report profit on Form K-1, then transfer the amount to Form Schedule E which gets it to the Supplemental income line on Form 1040, and that increases my income tax. But I don't do that. I create a liability expense in the business that pays both of us a SEP IRA. This business expense lowers my profit, and I created a traditional IRA for us in the future. But I don't stop there. Then I do a backdoor ROTH conversion before year end, and that is the taxable event where I now pay that tax for converting a ROTH. I would rather just pay tax on a ROTH conversion, rather than pay tax on business profit and get no IRA benefit.. So this ROTH IRA I just created doesn't cost me anything. Well, nothing more than the tax on profit I would have had to pay anyway. I hope more people with small businesses could adopt this form of savings. THUMBS UP!
Thanks a ton on the changes due to SECURES ACT. I had no idea my ROTH has to be taken over 10 years. i assume it's 10 years after I retire? I am 65 today and still contribute to a ROTH. I plan to work until 68. Now if at that point I must start taking my ROTH, I think I will continue at some small capacity to continue to work much fewer hours) as an excuse not to begin taking the ROTH till I'm damn good and ready. By the way… THUMBS UP!!!
Thank you for a great video I have been watching how to do Roth conversions for years. I finally got a good grasp of the ins & outs. My wife retires at end of 2021 then we will be in 12 % tax bracket. This would be a perfect time if the market crashing to start & convert.
I had my 401k rolled over to a traditional IRA early this year. Then I lost a large sum of the traditional IRA amount in the market. Should I recharacterize to a Roth IRA now, does it any difference what are the props and cons? Thanks
Thumbs down , they make a confusing, contradictory info about the Cares act new rules for Roths , specifically about our kids inheriting our traditional ira, and roth and having to take all the money in the next 10 years after your death .. at the 12:13 min then one fella contradicts himself at 15:14 and says all both traditional and Roths' must be takened not stretched ' over 10 years BUT forgetting to re-mention that they were originally talking about the 'stretch' applieing to your kids inheritance. one was left with the impression the retiree has to take all his money out of both accounts in ten years…I assume they are meaning 70.5. …they never did clarify this all the way thru the rest of their dialouge. ..they should focus more on the facts not their witty banter.
Great video and info. I’m 47 and started my Shawshank Roth conversion this year
Thumbs down for that annoying kid
One thing I've never heard or understood. Once you convert are you no longer able to contribute to that Roth after a certain income?
2. If you Shawshank Roth over time, do you end up with a bunch of different Roth iras or does it accumulate on one?
IRA…individual retirement arrangement.
If you feel taxes are going to be much higher in the future which I feel they are oh, then you should do a Roth. Mitigating circumstances considered, like age and tax bracket.
Love the Shawshank term for Roth conversion, I plan to do! I like that term better than a "ladder" Roth conversion, same thing. Also, love the expression "there is a sale on taxes now"!