As a result of the current market condition and changes due to the SECURE Act, Roth conversions are becoming a more appealing strategy. But before converting a traditional IRA to a Roth, there are a few things to consider.
What is a Roth Conversion?
A Roth IRA conversion involves the transfer of retirement assets from a traditional retirement account into a Roth account. There are a few different types of Roth conversions:
- Transfer money from a traditional IRA into a Roth IRA.
- Roll over a 401(k) to a Roth IRA.
- Move money from a traditional 401(k) to a Roth 401(k).
- Use a backdoor Roth IRA strategy.
In this checklist, we focus on the transfer of money from a traditional IRA to a Roth IRA. With this conversion, the account holder will pay the full tax the year that they convert, at ordinary income rates. Then, the dollars that they’ve converted will grow tax-free for the remainder of the time that they sit within the investment. When the month is withdrawn from the Roth, it’s all tax-free, as long as you wait until you are 59 and a half or older, and follow a few other rules.
If you’re considering a Roth conversion, this checklist covers considerations, such as:
- Changes in marginal tax rates.
- Ability to pay the associated tax with cash outside the retirement account.
- Five-year rule implications.
- The impact of income-based programs.
Related: 10 Things CPAs Should Know About IRAs
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