December is a great time of the year to talk to your financial advisor about possibly converting Traditional IRA dollars to Roth IRA. The strategy that we use is to talk with your CPA or tax preparer and do a mock tax return to see if any money can be converted and what the tax consequence would be. We have found that most CPAs or tax preparers will give you one planning consultation during the tax year.
You want to make sure you have all your income from W-2, Social Security or pensions. All possible income from savings and investments. You can get this infomation from statements. Any deductions like medical, mortgage interest, property taxes or charitable givings. Your advisor or CPA can help you gather the needed information.
Once you have this information you or your advisor can work with your CPA to run the mock tax return. Once you know your tax liability you then can add in the amounts you want to convert from your Traditional IRA to Roth IRA and try to find that sweet spot within your current tax bracket. The rules for conversion can be complex, and state income-tax rules for conversions may differ from federal rules. There are many things to consider before moving forward with converting to a Roth IRA. Three major factors to examine are your income, age, as well as your current and expected future tax bracket. I can help you determine if a conversion may be suitable for you.
The reason we like to entertain this IRA conversion stategy is we have to look to the future. We as savers and investers have been taught to defer taxes for retirement. Well the thing we tend to forget is there comes a day when we are forced to take that money out of those IRA accounts and pay taxes on it.
Once a person turns 70 1/2 they need to start taking Required Minimum Distributions (RMD) from these deferred accounts. So what this means is if you have a pension and are receiving Social Security you already have some tax liability. So being forced to take money form your IRA can put you in a whole new tax bracket. Depending the size of these IRA's this could be a pretty large number.
So by doing a little planning in the years when your income may have dropped and your not taking Social Security yet it is a great time to look at doing IRA to Roth Conversions.
Kadletz Wealth Management
A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 591/2, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.