To Convert or Not to Convert

06 Nov 2014

Should you convert your Traditional IRA to a Roth IRA? Well, I don’t know; the answer will depend on what’s best for your unique situation. Let’s looks at how it works. If you have a Traditional IRA you are allowed to convert the account to a Roth IRA. There are no longer income caps to convert. The value of the account becomes taxable income in the year converted. Here are some items to consider:

– Eliminates Federal Income Tax on future withdrawals.
– Money grows tax-free after conversion.
– Money can be inherited.
– No 70.5 Required Minimum Distributions.

I wish it was that easy, the reality is that like most things in life there are many moving parts. If your primary motivation is that you believe marginal tax brackets will rise in the future, you may be in for a surprise. Marginal tax brackets have actually decreased. According the the Federal Individual Tax Rate History provided by the Tax Foundation , Marginal tax rates were as high as 70% for married filing jointly over $215,400 in 1980. Remember the government can raise tax revenue in more ways than just raising marginal tax brackets.

Some other facts to consider include:

-Your tax bracket
-Your need to have the money to pay the taxes
-You can recharacterize the conversion by October 15 of the next year if you change your mind

 

With all of this in mind, I would suggest you think very carefully when deciding whether or not a conversion is right for you. It may help to make your decision in context with your financial plan, assuming you have one!

 

Good Luck!

 

Jeffrey A. Johnston, ChFC
President of Premier Investments of Iowa, Inc.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Premier Investments of Iowa, Inc. are not affiliated.

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Jeffrey Johnston

Jeffrey is originally from Solon, Iowa. He currently resides in Swisher, Iowa with his wife, Prudence, and his three children, Seth, Ian, and Roman. He graduated from the University of Northern Iowa in 1989, where he majored in Finance and Investments. He has 24 years of experience in the investment and estate planning business. He is currently the President of “Premier Investments of Iowa, Inc.” Jeffrey’s main focus is Estate and Investment Planning for Senior Citizens and Pre Retirees. Jeffrey became a Chartered Financial Consultant (ChFC) in 2001. He is the author of many articles on industry related topics and he is a frequent seminar presenter. He is a Board Member TRIAD Linn County Seniors Against Crime, and he is also a past Board Member of the Heritage Area Agency on Aging Task Force. He is a member of CEO Roundtable in Cedar Rapids, a Daybreak Rotary Member, and a member of the Cedar Rapids Estate Planning Council. In March of 2009, Jeffrey became the host of the Premier Investments of Iowa Financial Hour which airs every Tuesday Evening from 6PM -7PM, on WMT 600 AM Radio. In his free time he enjoys golf, fishing, scuba diving, traveling, and coaching son’s basketball teams.