What are Roth Conversions?
A Roth IRA account is a retirement account to which you can contribute after-tax dollars. Since you’ve already paid tax on the money being invested into the Roth IRA, your contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free.
Roth conversions are when you move money from a traditional retirement account into a Roth account. Since many contributions made to traditional retirement accounts are taken out of your paycheck before taxes are taken out, you will still owe income tax on any funds that you move from your traditional retirement account to your Roth account. Since any funds moved into your Roth account are subject to income taxes, you may be wondering what the advantages of moving them into the Roth account are when they could be left in your original account.
There are many advantages, including:
Tax-Free Withdrawals in Retirement: One of the primary advantages of a Roth IRA is that qualified withdrawals (contributions and earnings) are entirely tax-free. This can significantly reduce your tax liability in retirement.
No Required Minimum Distributions (RMDs): Unlike Traditional IRAs and 401(k)s, Roth IRAs do not have RMDs during the account owner's lifetime. This means you can keep the money in your Roth IRA and continue to benefit from tax-free growth.
Contribution Flexibility: Roth IRA owners must be 59 ½ years or older and have held an IRA for five years before tax-free withdrawals are permitted. This makes it a flexible account for both retirement savings and emergency funds.
Diverse Investment Opportunities: You can invest your Roth IRA funds in a wide range of assets, including stocks, bonds, mutual funds, ETFs, real estate, and more. This flexibility allows you to tailor your investment strategy to your specific financial goals.
Flexible Withdrawal Rules: Roth IRAs have more flexible withdrawal rules than Traditional IRAs. You can withdraw your contributions (but not earnings) at any time without penalties or taxes (certain restrictions do apply, such as the 5-year rule and the account owner must be older than 59 ½ ), making it a versatile source of funds for emergencies or major expenses.
Estate Planning Benefits: Roth IRAs can be passed on to heirs tax-free, providing a tax-efficient way to leave a financial legacy for your loved ones. Beneficiaries who inherit a Roth IRA can take required minimum distributions over their lifetime, potentially allowing the account to continue growing tax-free for an extended period of time.
The best way to determine if a Roth IRA is right for you is to speak with our team at Middlebrook Wealth. We are here to help you determine the best path forward to continued financial success.
Any opinions are those of Middlebrook Wealth and not necessarily those of Raymond James. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax
advisor before deciding to do a conversion. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax-free. IRA tax deductibility and contribution eligibility may be restricted if your income exceeds certain limits, please consult with a financial professional for more information.
Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional. RMDs are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.
