With the possibility of new tax legislation on the horizon, Roth conversions are a hot issue, and you should talk about them with your customers this year. Several factors influence whether or not your customers can convert their Roth IRA. A GUIDE TO ROTH IRA CONVERSIONS For Professional Use Only | BFS2022GTRC 1 [email protected] • www.bedrockfs.com • 800-779-4182
Table of Contents 3 Reasons To Convert to a Roth 3 Roth IRA Conversion: What exactly is it? 4 Roth IRA Conversion Considerations 5 Isolating the IRA's basis 5 Conclusion
Roth IRA Conversion: What exactly is it? Reasons To Convert to a Roth A Roth Conversion takes your pre-tax retirement savings (401K, 403B, TSP, SEP IRA, SIMPLE IRA, or a Traditional IRA) and turns it into post-tax retirement savings. Converting to a Roth Individual Retirement Account (IRA) is an option worth considering for multiple reasons: 9 Rising Tax Rate Protection: a Roth IRA grows tax-free. When one reaches retirement age and begins taking withdrawals the distributions are tax-free1. This is important because if tax rates increase, you wont have to worry about taxes affecting your retirement income. 9 Higher Retirement Income: because your distributions are income tax free, you will have more spendable cash. 9 The beneficiaries of your Roth IRA will also inherit the tax status of your Roth IRA. This means they can let the account compound tax free up to an additional ten years after your passing. 9 Roth IRAs do not have a Required Minimum Distribution. While Traditional IRAs (pre-tax retirement funds) have a minimum that must be withdrawn every year after the age of 72 (this is called a Required Minimum Distribution), Roth IRAs are exempt from this rule. 1 Qualified Roth distributions are tax-free if: 9 Held for five years since the first Roth conversion or contribution; and 9 Age 59 1⁄2, or 9 Disabled, or 9 Death (paid to a beneficiary), or 9 First-time homebuyer – Up to a $10,000 lifetime limit 800-779-4182 For Professional Use Only | BFS2022GTRC 3 [email protected] • www.bedrockfs.com • 800-779-4182
If taxable income Monthly benefit amount: 0 – $19,900 10% of taxable income $19,901 – $ 81,050 $1,990 + 12% of the amount over $19,900 $81,051 – $172,750 $9,328 + 22% of the amount over $81,050 $172,751 – $329,850 $29,502 + 24% of the amount over $172,750 $329,851 – $418,850 $67,206 + 32% of the amount over $329,850 $418,851 – $628,300 $95,686 + 35% of the amount over $418,850 $628,301 $168,993.50 + 37 % of the amount over $628,300 Roth IRA conversions can make sense in a variety of circumstances, but they aren't always the best option. Converting to a Roth IRA is a taxable event and is not right for everyone. You should consider the following when determining if converting to a Roth IRA is right for you: Joint tax rates 2021 Source: KPE/IRS 9 Position: Do you think you will be in a higher or lower tax bracket at retirement than you are currently? This is the biggest factor in determining if a conversion is right for you. If you think you will be in the same or higher tax bracket at retirement a Roth IRA may be better. If you think you will be in a lower tax bracket at retirement, you may want to consider not rolling over. Roth IRA Conversion Considerations 9 Income and taxes: When you convert to a Roth IRA, the amount converted is treated as regular income. Depending on your current income, a conversion could throw you into a higher tax bracket, or the tax on your Social Security could be raised. According to historical precedent, conversions in the 10%, 12%, 22%, and 24% tax brackets have typically had modest tax rates. Despite this, a Roth conversion in the year of conversion might result in a higher tax on Social Security income. Running a tax prediction will help you choose the appropriate amount of tax to pay. Converting your Roth while married might be favorable since tax rates are so broad in this situation. A married couple filing jointly would be taxed at a rate of 24% on taxable income, up to $329,850. 9 Marital Status: The conversion can often be advantageous for married couples because of the wide tax brackets. An unmarried individual has narrower tax brackets by comparison. 9 Tactical Considerations: Do you have losses you can take or charitable contributions you can make to offset the taxes that need to be paid from the conversion? 9 Medicare IRMMA Charges: Income-related monthly adjustments use a 2-year look-back. Since a Roth Conversion is taxed as regular income, it could elevate your annual income incorrectly. A strategy that you can use to plan for this is converting your IRA before age 63. For Professional Use Only | BFS2022GTRC 4 [email protected] • www.bedrockfs.com • 800-779-4182
After-tax and pretax monies are included in each Roth conversion depending on the IRA balance's proportion to the overall IRA amount, according to the pro-rata rule (which includes all traditional IRA accounts, including SEP and SIMPLE IRAs). Keep in mind, however, that the IRAs of the taxpayer and their spouses are not blended. For example: a taxpayer has $300K in their traditional IRA with a basis of $60K. For each dollar converted, the taxable portion would be 80 cents. The taxpayer’s IRA came from an old employer’s retirement plan, and the current employer is willing to accept the traditional (pre-tax) IRA monies as a rollover into their retirement plan. Accordingly, the taxpayer sends $240K to the retirement plan and then converts $60K to a Roth IRA tax-free. Isolating the IRA's basis Conclusion Investors who wish to make well-informed tax-related decisions concerning Roth conversions should seek the assistance of tax professionals. When you help people make the most of their money, your worth to them as a customer or potential client grows exponentially. 800-779-4182 For Professional Use Only | BFS2022GTRC 5 [email protected] • www.bedrockfs.com • 800-779-4182
For Professional Use Only | BFS2022GTRC 6 [email protected] • www.bedrockfs.com • 800-779-4182 Bedrock Financial Services [email protected] www.bedrockfs.com
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