Should You Make a Roth IRA Conversion?

Written by: Will Holt

One of the tools that is available to increase tax efficiency is a Roth IRA conversion .

For many, this is thought of as a way to superfund your Roth IRA, but the details are important and can influence your decision one way or the other.

The idea behind this strategy is to transfer a specific amount from a pre-tax account to a Roth IRA so that a low tax bracket is maximized.

An example of when we will use a Roth conversion is for a client that has retired, but has yet to start drawing Social Security benefits. We will consider a Roth conversion if they have begun taking Social Security benefits, but the opportunity is usually missing or very limited because of the Social Security tax bubble . They also need to have tax efficient resources such as after-tax savings to fund cash flow needs.

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One of the great things about Roth conversions is the ability to recharacterize all or a portion of the amount converted back into the pre-tax account.

This can be incredibly valuable because even the best laid plans can go awry. Income from an irregular source or loss of deductions that weren’t factored in can push taxable income into a higher bracket than we want. We can use a recharacterization to get back to the tax efficient target we had set in our tax plan. The recharacterization is basically a do-over which is a rare thing in the world of taxes.

The Roth conversion has to happen by December 31st of the tax year involved, but a recharacterization can occur as late as October 15th of the following year. If you made a Roth conversion in 2016 you still have time to recharacterize. The rules for a recharacterization require that you put back not just the amount (or partial amount) of the original conversion, but also any gains or losses attributable to the amount being recharacterized.

The goal of a Roth conversion strategy is primarily to achieve the lowest overall tax rate across multiple years.

Good execution requires ongoing analysis because things change from year-to-year that must be adjusted for to maximize efficiency. Our Continuous Service is designed to be comprehensive because it takes that level of coordination to make the most of opportunities and to avoid mistakes . If you think a Roth conversion might be a good fit for your situation please contact us to discuss your options.