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Roth IRA Conversions: 5 Factors Your Clients Should Consider

Posted by Lori Fogle on Wed, Jun 19, 2019 @ 12:00 PM

To make it easier for you to share, save, or print the key factors for clients to consider when doing a Roth IRA conversion, we've created an infographic for you. Check it out below.


Converting an existing traditional IRA or 401(k) to a Roth IRA can be a good idea, especially if clients consider it beneficial to pay taxes now rather than deferring and paying them in retirement. Many factors can come into play when clients make that decision. Here are five important points clients should be aware of as they contemplate a Roth IRA conversion:

  • A conversion is a taxable event. When converting an existing IRA or 401(k) to a Roth IRA, clients are making a trade-off: Pay taxes now to avoid having to be strapped with that tax bill in retirement. However, clients may want to take action when they’re in a lower tax bracket. For a lot of individuals, they may have been put into a lower tax bracket with the passing of the Tax Cuts and Jobs Act (TCJA) at the beginning of 2018 and could take advantage of that while it’s still in effect.

  • Current tax law prohibits the recharacterization of a Roth IRA. With the Tax Cuts and Jobs Act, the recharacterization option was eliminated for conversions made 2018 or later. What this means is that if a client converts to a Roth IRA, the transaction would most likely be irreversible. So, they need to be certain they can shoulder the tax liability in that year. There may be instances where it’s still possible to recharacterize and clients should seek guidance from a tax professional.

  • It may not be a good idea to pay taxes on a conversion out of an existing IRA or 401(k). It’s best if a client has outside funds to pay taxes on a conversion. Using funds in the IRA or 401k sacrifices some of the tax-free growth since most retirement plan distributions are subject to income tax and may be subject to an additional 10% tax. Distributions to individuals pre- 59 ½, referred to as "premature distributions," could be subject to this additional 10% early withdrawal tax, unless an exception applies. This is because they’re essentially “withdrawing” funds from the 401k or IRA to pay their taxes. They can pay taxes from an existing IRA or 401(k), but it’s good to be aware of the down side of that.

  • There are strings attached to tax-free withdrawals. The purpose of converting to a Roth IRA is to take advantage of tax-free withdrawals in retirement, however, there is a 5-year rule and penalties that could apply when making early withdrawals of any earnings or interest and index credits. More details about Roth IRAs and qualified distributions can be found in Publication 590-A.

  • Converting large amounts could bump clients into a higher tax bracket. Since a Roth IRA is funded with after-tax dollars, a client would not deduct contributions from their taxable income. Therefore, when doing a Roth IRA conversion, they are “giving back” that deduction and in turn, increasing their taxable income. This could cause them to be bumped into a higher tax bracket. One way they could possibly lessen the tax burden, is to convert portions of their IRA or 401(k) over time.

*Partners Advantage does not give tax advice and strongly suggests you have your clients work with a tax professional — preferably a CPA or tax attorney — regarding any Roth IRA conversion.


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Tags: taxes, Roth IRA



This content is for informational and educational purposes only and is not designed, or intended, to be applicable to any person's individual circumstances. It should not be considered as investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action.