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Four Benefits of Roth Conversions In or Near Retirement

Posted March 29, 2019 by John Posey

If you or your spouse have traditional retirement plans like 401(k)s or IRAs and you’re nearing or in retirement, a Roth IRA conversion might be worth considering. Traditional retirement accounts are funded with pre-tax dollars, meaning you will pay ordinary income tax on the funds as you withdraw them. Roth IRAs are different in the fact that they are funded with post-tax dollars(you receive no tax deduction for the contribution) and withdrawals are tax-free beyond age 59 ½ if the Roth IRA has been established for five years or more.  It would be wise to talk with your tax advisor about this idea. 

Periodic Roth conversions could lower your tax bill

If you or your spouse rocked the cradle so to speak, the potential benefits could be significant for you. A surviving spouse will eventually have to file as a single tax payer where the tax brackets are reduced, more easily subjecting them to higher tax rates.  It may make sense to do Roth conversions over time where you take funds from your traditional, pre-tax IRA, realize the amount you convert as income, pay the tax(with non-retirement funds) and contribute those funds to a Roth IRA. Presumably with both spouses alive filing as joint filers and realizing some of your pre-tax retirement funds as income each year, your ultimate tax liabilities could be lower over time using this strategy. The idea would be to realize income each year from completing Roth conversions to a point that does not significantly or adversely affect your current tax situation. It’s best to coordinate this kind of strategy with your tax professional. 

No required minimum distributions  

Roth IRA funds are not subject to minimum required distributions as standard with most traditional retirement plans starting at age 70 ½.

Your heirs receive Roth IRA funds tax-free 

Distributions after death from a Roth IRA are not taxed to your heirs. Conversions can be particularly beneficial when individuals are in lower tax brackets than their heirs.  

Opportunistic timing of a conversion could result in tax savings 

The best time to consider a Roth conversion is when your retirement accounts are experiencing a decline in value. You will pay ordinary income tax on the value you choose to convert and if those values are coming from securities that declined in value and you intend to stay invested in them to recover value and grow over time, you essentially pay tax on those assets at a lesser value than you may have otherwise. Plus, those assets will get the opportunity to grow tax-free in the Roth IRA. Of course there’s no guarantee this strategy will work in your favor each time but it’s a prudent thought none the less.

If you’re close to or in retirement, take a look at this idea. It might save you some hard earned dollars throughout your retirement. 

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Advisory services offered through Plains Advisory LLC, an investment adviser registered with the State of Nebraska. Insurance products and services are offered and sold separately through John Posey, a licensed insurance agent. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

Any information provided is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal, tax, financial or investing advice and cannot be used to avoid tax penalties or to promote, market, or recommend any plan or arrangement. Please note that Plains Advisory LLC does not give legal advice. You are encouraged to consult an attorney.