Bucks Writs - Spring 2019 - 23

Why Convert to a Roth IRA?

$77,400 you move into the 22% bracket. You might
wish to convert up to $27,400 of your traditional IRA to a
Roth IRA. From a taxwise perspective this could be more
attractive than a full conversion, because if you converted
the entire IRA this year, you could pay tax on some of the
conversion at rates as high as 32%.

Tax-savvy investors want to pay as little income tax as
possible. Converting to a Roth IRA may allow you to make
a tax move that will save you or your beneficiaries money
in the long run.

Roth Conversions in Low Tax
Years Could Be Attractive
A good time to explore a partial Roth conversion can be
during a year when you have a lower income than you
expect to have in the future. This could include someone
who just retired, is no longer employed, or has made large
deductible charitable gifts.
Partial Roth conversions typically make the most sense in
low income years. They can be helpful when you are in the
early years of retirement (before RMDs & Social Security
begin). In this instance, you can consider converting some
of your IRA assets to a Roth IRA and paying federal ordinary
income taxes (and state taxes where necessary) on the
amount converted.

For example, if you anticipate your income dropping significantly in a certain year (and increasing in following years),
you could plan a conversion (or partial conversion) for the
low-income year. Since your income is lower, you may be in
a lower tax bracket when you convert.
Similarly, if the government announces a tax-rate increase
to go into effect in a future year, a conversion in the current
year could possibly save income tax.

A good time to explore a partial Roth
conversion can be during a year when you
have a lower income than you expect to have
in the future. This could include someone
who just retired, is no longer employed, or
has made large deductible charitable gifts.

Converting to a Roth IRA could assure that you will owe
no additional income tax on the converted funds-and any
money those funds will potentially earn before you withdraw
them-during retirement. The balance in your portfolio likely
will be what you can take out and use in retirement and you
most likely won't have to calculate an after-tax balance.

If you do not use Roth IRA conversions when you are in low
tax brackets during low income years, you will be forced to
take out minimum required distributions (RMDs) from your
traditional IRA funds at age 70½, when you might be in
a higher tax bracket, thus increasing the amount of taxes
you pay during that time. A pre-70½-year-old can take
advantage of any low tax years if their marginal tax brackets
will likely be increasing because required minimum distributions (RMDs) and Social Security might move them to a
higher tax bracket in the future.

Partial Roth IRA Conversions
Making a Roth IRA conversion does not have to be an
all or nothing decision. Although the rules surrounding
partial conversions can be complex, a competent financial
professional can help you understand the tax impacts and
rules that govern converting some, all, or none of your
existing IRA to a Roth IRA. Like any other decision, all of the
variables of your particular situation should be considered.
You should consider running the numbers for your situation
to best determine the impact of making a full or partial
conversion to a Roth IRA.

As an example, let's look at a 63-year-old in a married
household who files a joint tax return and also has a significantly large traditional IRA. The traditional IRA will begin
requiring RMDs at age 70½ and Social Security payouts
must begin by age 70 as well. If this household's only

For example, suppose you are a married taxpayer filing
jointly with $50,000 of taxable income and you have
$300,000 in a traditional Roth IRA. Your marginal tax
bracket is 12%. However, if your income increases above
23

SPRING 2019

Bucks Writs - Spring 2019

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