Roth IRA Conversions・Guidelines, Considerations, and Strategies

A Roth IRA is a retirement savings account that uses after-tax dollars for contributions, offering you tax-free growth and tax-free withdrawals in retirement. It’s possible to convert any portion of a traditional, SEP, SIMPLE IRA, or 401(k) to a Roth IRA, regardless of income level.

Deadlines & Processing

• Conversions must be completed by December 31 each year to count towards that tax year. The taxpayer does not get until April 15 of the following year, as is the case with contributions.
• New Roth IRA accounts need new beneficiary forms.

Tax Considerations

• Consider your tax bracket. If a taxpayer is going to be in a lower tax bracket in future years, it might not make sense to do a conversion now (in a higher tax bracket).
• Taxpayers will receive a Form 8606 if a conversion came from a retirement account with basis. The tax-free amount of the conversion is determined based on this reporting.
• If there are associated taxes with the conversion, ensure you have cash available outside of retirement accounts to cover costs.
• When you are ready to take money from your Roth IRA, be aware of the five-year rule. Distributions are generally tax free, however distributions of earnings from a Roth are taxable if distributed within five years of first establishing a Roth.

SIMPLE IRA Rule

If the conversion is coming from a SIMPLE IRA, certain rules apply. A distribution from a SIMPLE IRA made during the two-year period that begins on the date that the individual first participated in a SIMPLE maintained by the individual’s employer cannot be converted to a Roth.

Situations Where a Conversion Might Make Sense

1. Will your Required Minimum Distribution (RMD) push your income up to levels where Social Security becomes taxable?
   You may want to “take the hit” all at once and do a conversion in the current year. Without RMD, a taxpayer’s Social Security may be tax-free.
2. Do you expect your Required Minimum Distribution (RMD) to push you above the active participation threshold for passive losses?
   You may want to “take the hit” all at once and do a conversion in the current year. Without RMD, taxpayers may be able to take up to a $25,000 deduction for active participation losses in future taxable years.
3. Do you have a contributions carryover or wish to make sizable contributions during the year?
   You may want to do a conversion to offset the contributions or you may want to make contributions during this year to offset a conversion.
4. Do you have a Net Operating Loss (NOL) carryover?
   You may want to do a conversion to offset the NOL.
5. Is your income unusually low?
   You may want to consider a conversion to use excess deductions or, at the very least, to take IRA distribution into income at low tax brackets.

We’re always available to discuss options unique to your financial situation. Learn more about our team and our services at greatdiamondpartners.com.

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