We are back with another Retirement Talk with Ruby!
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Today we are discussing some key points from Tax and IRA Expert Ed Slott’s article “Clarifying Some Roth Conversion Misconceptions.” Some of the questions that Andrew and Ruby (our favorite French Bulldog) answer include:

🐶 Are there income limits on Roth Conversions?
🐶 Can you do Roth Conversions on your Inherited IRA?
🐶 Are there limits on how much you can convert?
🐶 RMDs and Roth Conversions
🐶 Roth Conversions and Medicare (IRMAA surcharges)

If you like this content, watch our latest interview with tax and IRA expert Ed Slott “How to Avoid the Retirement Savings Tax Time Bomb”
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DISCLOSURE: Investment Advisory Services may be offered through Bayntree Wealth Advisors, a registered investment adviser. Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation….(read more)

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retirement planning can be a tricky affair, but converting a traditional IRA into a Roth IRA can be an excellent option for some investors. This conversion allows the investment earnings inside the Roth IRA to grow tax-free, and in retirement, distributions from the Roth IRA are also tax-free. However, the process of converting a traditional IRA into a Roth IRA can be complex, and there are several pitfalls to avoid. In this Retirement Talk with Ruby🐶 article, we will discuss some common Roth IRA conversion mistakes and how to avoid them.

Mistake #1 – Underestimating the Tax Implications

Converting to a Roth IRA means having to pay taxes on the amount of funds transferred from the traditional IRA. This consideration is often overlooked by investors, and the tax bill ends up being larger than expected. It’s important to speak with a tax professional to understand the tax implications and ensure that you have enough funds set aside to cover the taxes due.

Mistake #2 – Not Considering Your Time Horizon

The decision to convert to a Roth IRA should align with your overall retirement goals and timeframe. If you are far from retirement, converting to a Roth IRA and paying taxes now may not be the best option. The longer the timeline, the more opportunity for investment earnings to grow tax-free within the Roth IRA. Conversely, if you are nearing retirement or already retired, a Roth IRA may be a good option to minimize tax liability.

Mistake #3 – Failing to Plan for Minimum Distributions

Another factor to consider when converting to a Roth IRA is the required minimum distributions (RMDs). Although Roth IRAs do not require taxes on distributions, they do have RMDs starting at age 72, which may impact your financial planning. If you don’t need to withdraw funds from your IRA, Roth or traditional, to meet your living expenses, then converting to a Roth IRA will provide you with more flexibility since Roth IRA withdrawals are not subject to RMDs.

Mistake #4 – Missing the Deadline for Recharacterization

The IRS also allows investors who have converted to a Roth IRA to change their mind and recharacterize the Roth IRA to a traditional IRA. Investors have until the tax-filing deadline (including extensions) to recharacterize the account, and it can be an effective strategy if the tax implications of the conversion turn out to be more significant than expected.

Mistake #5 – Converting Too Much in One Year

Converting a sizeable amount of a traditional IRA to a Roth IRA can push you into a higher tax bracket. Spread out the conversion of funds over several years to minimize the tax liability. Also, consider how much you can convert while still staying within your current tax bracket. If you move up to the next bracket, it may be better to wait until the next year to convert additional funds.

In conclusion, converting to a Roth IRA can be an effective strategy to minimize your tax liability in retirement. But, as with any financial decision, it’s crucial to take the time to understand the implications fully. Always seek professional advice to ensure that you maximize your benefits and avoid any costly mistakes as you plan for financial security.