Is Now the Right Time to Go Roth?
Some say yes, pointing to the recent federal tax reforms.
Ariel Monsivais, Jr., CFP®,
located at Abri Credit Union
Will federal income tax rates ever be lower than they are right now? Given the outlook for Social Security and Medicare, it is hard to imagine them falling much further. Higher federal income taxes could very well be on the horizon, as the tax cuts set by the 2017 reforms are scheduled to sunset when 2025 ends.
Not only that, the federal government is now using a different yardstick, the chained Consumer Price Index, to measure cost-of-living adjustments in the federal tax code. As an effect of this, you could gradually find yourself in a higher tax bracket over time even if tax rates remain where they are, and today’s tax breaks could eventually be worth less.1
So, this may be an ideal time to convert a traditional IRA to a Roth.
A Roth IRA conversion is a taxable event, and so if you have a traditional IRA, you may be thinking twice about it. If the IRA is large, the taxable income linked to the conversion will be sizable, and you could end up in a higher tax bracket in the year the conversion occurs. That literally may be a small price to pay.2
What would you rather have – years of tax-free IRA withdrawals, or years of IRA withdrawals that might be taxed more than they would be today? If you decide against going Roth, you leave a door open to that second possibility. If you go Roth, you open the door to the first.
The jump in your taxable income for the year of the conversion may be a headache – but like many headaches, it promises to be short-lived. Consider the many perks that could come from transforming a traditional IRA balance into a Roth IRA balance (and remember that any taxpayer can make a Roth conversion, even a taxpayer whose high income rules out the chance of creating a Roth IRA).3
Generally, you can take tax-free withdrawals from a Roth IRA once the Roth IRA has been in existence for five years and you are age 59½ or older. If you end up retiring well before 65 (and that could happen), tax-free and penalty-free Roth IRA income could be very nice.3
You can also contribute to a Roth IRA all your life, provided you earn income and your income level is not so high as to bar these inflows. In contrast, a traditional IRA does not permit contributions after age 70½ and requires annual withdrawals once you reach that age.2
Lastly, a Roth IRA is convenient in terms of estate planning. Roth IRA assets transfer to your heirs without being taxed.3
A Roth IRA conversion need not be “all or nothing.” Some traditional IRA owners elect to convert just part of their traditional IRA to a Roth, while others choose to convert the entire balance over multiple years, the better to manage the taxable income stemming from the conversions.2
Remember, however, that you can no longer undo a Roth conversion. The Tax Cuts & Jobs Act did away with so-called Roth “recharacterizations” – that is, turning a Roth IRA back to a traditional one. Now, this do-over is no longer allowed.2
Talk to a tax or financial professional as you weigh your decision. This really does look like a prime time for pre-retirees to go Roth, but the move is not for everyone. Occasionally, the resulting tax hit may seem to outweigh the potential long-run advantages. Study the various financial implications before making the move.
Ariel is here to help.
Email Ariel or Call (815) 409-4861
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, INC (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (866) 512-6109. Trust services available through MEMBERS Trust Company. Non Deposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. *The CFP certification marks are not affiliated with CINA Brokerage Services, INC.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - money.cnn.com/2017/12/20/pf/taxes/tax-cuts-temporary/index.html [12/20/17]
2 - marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [8/17/18]
3 - fidelity.com/building-savings/learn-about-iras/convert-to-roth [8/27/18]