John Foligno, CMC®
John has nearly 30 years of professional work and coaching/mentoring experience, which includes over 10 years of running his own business. Through empathy, active listening, and thoughtful counsel, he lives his personal mission by inspiring people to overcome the roadblocks that prevent them from accomplishing their goals and helps them to find enlightenment, fulfillment, and financial well-being. He specializes in supporting business owners and professionals, although he enjoys working with all manner of people. John attended Syracuse University – Martin J. Whitman School of Management and earned a Bachelor’s of Science, Finance, Marketing (double major), Economics (minor).
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When rolling funds over or converting from a qualified retirement accounts (401k, Traditional IRA, SIMPLE IRA, or SEP IRA) to a Roth IRA, you will need to pay the taxes, as those accounts were funded with pre-tax dollars. If you have sufficient cash available, consider using that money to pay the taxes so you can keep your retirement account intact, allowing for more tax-free growth.
Here’s some ways that a Roth conversion could help you to be tax-efficient.
No RMDs
Because you paid the taxes at the time of conversion, you eliminate the need to take required minimum distributions (RMDs), thus reducing your taxable income during retirement.
Reduced Income
A Roth conversion could be beneficial if you anticipate lower income in a given year, such as when you launch a business, get laid off, or in your early retirement years, as you would generally be paying a lower tax rate.
Sizeable Retirement Accounts
If you have accumulated significant balances in your qualified retirement accounts, Roth conversions done over several years prior to taking your RMDs could help reduce that future tax burden, assuming you would be in a higher tax bracket.
Legacy Planning
For a non-spouse beneficiary, the Roth IRA would benefit your heirs as it reduces their taxable income since the withdrawals would be tax-free.
Roth conversions can be complicated, and mistakes can lead to penalties. For example, after converting funds into a Roth IRA, there is a five-year waiting period before you can begin taking earnings withdrawals, regardless of whether you are age 59½, otherwise you will incur taxes and possibly penalties. And if you do conversions at different times, each tranche of converted funds has its own five-year period.
Here are some other perspectives from XYPN Good Financial Reads.
This article was originally published here and is republished on Wealthtender with permission.
About the Author
To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Read our editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.
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