Retirement Planning: Roth IRA Conversion Points to Consider
The dominant IRA conversion logic is to pay tax now, convert to a Roth IRA and avoid tax on future IRA distributions.
To complicate the discussion further, consider the source of the funds needed to pay the conversion tax. Once paid to the Government, that money is no longer available to generate interest or investment gains. That is the opportunity cost of prematurely paying taxes.
Which brings us to Roth conversion Rules:
* Rule #1 - Never pay the conversion tax from your IRA. Put simply, if you don't have the funds available outside of your IRA, don't convert. Shrinking a tax-deferred account to pay tax and avoid future taxes is math that does not work well.
* Rule #2 - The tax payment is certain. In other words, your future income and taxes are uncertain, as are your future investment returns. But the tax payment to make the IRA conversion is certain, so you should have a strong case and convictions about your future situation.
* Rule #3 - Don't convert near the start of distributions. The primary Roth advantage is that all interest and earnings are tax free at withdrawal. Thus, it is important to give those assets time to accrue gains and the tax advantages. I generally consider seven to ten years to be sufficient.
* Rule #4 - Create a balance of tax-deferred and tax-free retirement income - traditional IRAs providing the tax-deferred income and Roth IRAs providing tax-free income.
Be Wary of Broad Advice
The mass of articles and examples surrounding Roth IRA conversions seem to suggest that there is a way to offer good financial advice via an article or newsletter. However, too much of the discussion has focused on why to convert your IRA to a Roth, with very little effort on why not to convert. Good financial advising seeks to illustrate pros and cons and enable individuals to make informed decisions. Use this broad advice as a starting point when considering your retirement. .
|Respond Directory lists the top Retirement Planners in your area, organized by specialty and office location.|