If you’re like many other Americans trying to get organized with their finances during this volatile market, we celebrate you. If you are still procrastinating, we are glad you’ve arrived. Whether you’ve been saving, investing, and tax planning in San Antonio, TX, for years or are brand new to the retirement planning game, we aim to ensure you are up-to-date with the ins and outs of Roth IRA conversions, as it could be a powerful tool for your financial future.
A Roth IRA is a retirement savings account with many advantages over traditional IRAs. And since 2010, people who have Traditional IRAs can convert them to a Roth IRA. But there are some pros and cons of Roth conversions to consider before you make this decision.
Anyone with an IRA can convert all or part of their Traditional IRA to a Roth
For over a decade, anyone with an IRA can convert all or part of their Traditional IRA to a Roth. This is a change from previous years where income and age requirements limited who could convert their Traditional IRA to a Roth. As long as you have earned income and are under the required age (see below), you can convert your Traditional IRA into a Roth at any time.
There are no minimum amounts that must be converted either. You can convert any amount from your Traditional IRA into your Roth at any time, even if it is just $5!
If you’re considering converting your IRA to a Roth, the Texas tax pros at PAX are here to tell you about some of the advantages and disadvantages of doing so.
Understanding the pros and cons of a Roth conversion can help you plan and act with intention to reach your financial goals. Converting your IRA to a Roth with the Texas tax pros at PAX can help you assess your ability to protect and grow your wealth.
You can convert a traditional IRA to a Roth IRA if you meet specific requirements:
You must have earned income in order to convert your traditional IRA into a Roth. You cannot convert your traditional IRA into a Roth if you have no earned income.
There are limits on how much can be converted: $6,000 per year or $7,000 if over age 50 (capped at $1 million). If the amount exceeds these amounts due to market fluctuations between when you made your original contribution and when taxes were paid on it, then that portion will be taxable as ordinary income (rather than long-term capital gains)
Pros of a Roth conversion
The main pros of a Roth conversion are as follows:
Tax-free withdrawals: If you're eligible to withdraw money from your Roth IRA without paying taxes, you'll be able to use it for retirement planning or any other purpose without worrying about owing taxes on it. This is especially helpful if you plan on using the money at some point in the future, such as when paying for college tuition for your kids.
Tax-free growth: Money that grows within a Roth IRA will not be subject to taxes when withdrawn, which means that if you invest wisely and allow your investments time enough to gain value, all gains can be tax-free.
Tax-free contributions: Any contributions made into a Roth IRA are made on an after-tax basis (meaning they're paid with after-tax dollars). Therefore when they're withdrawn during retirement, they won't count toward income levels and increase one's taxable income level either!
Cons of a Roth conversion
You will have to pay taxes on the conversion.
You will have to pay taxes on the earnings.
You must wait five years before withdrawing earnings from your Roth IRA. This is a disadvantage because many other types of IRAs allow you to withdraw contributions at any time without taxes or penalties. However, it will enable you to choose your withdrawal schedule so that if you want more money for retirement, you can take out more than what would typically be allowed each year without being penalized.
Converting traditional to a Roth IRA with a Texas financial advisor
The conversion process can be a bit confusing. That's why it's essential to consult with an experienced Texas financial advisor who can help break down the rules and regulations and ensure that your account is set up according to the law. Remember, you pay taxes when the conversion happens.
So, let’s say you convert $5,000 from your traditional IRA into a Roth and then withdraw it at age 59½ when you're required to start taking mandatory distributions (RMDs). You won't owe additional taxes on those withdrawals since they were already paid during the initial conversion. This is good because most people don't want more money taken out of their hands, but there are strategies based on your tax bracket, so make no assumptions.
If you were under 59½ when withdrawing funds from your traditional IRA after converting them into a Roth account, those withdrawals would still be subject to income tax and any early withdrawal penalties. Even though this rule varies depending on which state laws apply within each state jurisdiction, double taxation could be involved here: once by deferring these taxes until retirement age; then again through regular pre-retirement withdrawals from both accounts before age 59½.
It may be fun to use this Roth conversion calculator to get a good idea of numbers before giving us a call (completely optional).
No one wants to pay more than they have to. If you are planning on retiring in the San Antonio area and need strategies to help mitigate your taxes in retirement, reach out for professional tax planning in San Antonio, TX. When it comes to protecting your wealth, PAX has an entire team with the tools you need to reach your financial goals.
We hope this article has helped you understand the pros and cons of a Roth conversion. Please don’t hesitate to reach out to PAX Financial Group for more information on how we can help you confidently navigate these decisions.