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What is a Roth Conversion?

Roth conversions are a way of transferring funds from a retirement account, such as a Traditional IRA or SIMPLE IRA, to a Roth IRA. In most cases, the amount transferred is taxed in the year of the conversion. Typically, taxes are paid on funds when transferred to the Roth account, but once withdrawn, neither the principle nor the gains are taxed. This allows you years of tax-free gains during your retirement.

How to Do a Roth Conversion

The easiest way to do a Roth conversion is through a trustee to trustee transfer from the traditional IRA to the Roth IRA. It is imperative to consult a qualified financial planner before doing a Roth conversion to avoid pitfalls that could cost you taxes and penalties.

When and Why to Consider a Roth Conversion

The advantage of a Roth IRA over a Traditional IRA is tax-free treatment of qualified withdrawals. If your tax bracket is lower now, or even the same, as you anticipate it to be in retirement, doing a Roth conversion could be beneficial to you. When you do the conversion, you will pay the taxes on the funds, so that in the future when you are in a higher tax bracket, you can get the funds tax-free. Talk to a financial planner to see if this makes sense for you.

As part of the Coronavirus stimulus package, the CARES Act, Required Minimum Distributions (RMDs) do not have to be taken in 2020. That may make this an especially attractive time to do a Roth conversion. If you do not depend on your RMD as a source of income, a Roth conversion may be worth considering. Forgoing the required minimum distribution this year and instead doing a Roth conversion will allow you to move funds into a Roth IRA while not incurring more taxes than you would have from your RMD alone.

Talk to a Financial Planner

Whether or not a Roth conversion is in your best interest varies depending on your current situation and your expected future situation. The above is for informational purposes only and is not to be taken as advice. Please talk to your Fee-only Certified Financial Planning TM Professional before doing a Roth conversion.

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