Everything You Need to Know About Roth IRA Conversions

By July 15, 2019 Blog No Comments

When it comes to saving for retirement, one of the best things you can do is contribute to an IRA. You can do this with either a traditional or a Roth IRA, with both options giving you substantial tax benefits.

For the most part, however, Roth IRAs are going to provide you with the best financial benefits, especially during retirement. Because you aren’t taxed when you take out the money, it’s better to use this system than a traditional IRA. However, because of the way the system is set up, you will likely have to convert your money between these two accounts.

This may seem complicated at first, but we’re going to break down the process, why it matters, and why it will benefit you in retirement.

Traditional vs. Roth IRA – What’s the Difference?

Before we get into how to convert your money into a Roth IRA, let’s go over the differences between these two options. This will help you understand better why it’s beneficial to convert.

Income Restrictions

With traditional IRAs, you can contribute as much as you like, up to the maximum. Currently, that is $5,500 for those under 50 and $6,500 for those over 50. One of the primary benefits of traditional IRAs is that you can claim tax benefits the year you contribute, based on how much you make. We won’t list out all of the various options available, but you can check out the IRS website to find out more about whether or not your money is tax deductible.

With a Roth IRA, however, you do have income restrictions. As of 2018, single filers can only contribute if they have a modified adjusted gross income (AGI) of $135,000 or less. Also, you may be affected by contribution limits if your income is between $120,00 and $135,000.

For couples, that number is $199,000, with limits phasing out at $189,000.

Tax Deductions

No matter what kind of IRA you choose, the IRS provides various tax incentives. As we mentioned above, with a traditional option, you get the benefit in the year you contribute. The downside, however, is that you have to pay taxes on your income when you take the money out.

A Roth IRA essentially works in the reverse. Instead of paying taxes when you withdraw, you pay them when you contribute. This can work better for retirement because all of your income is now tax-free. Also, you only have to keep the money in the account for five years before you can withdraw penalty-free.

But what about the money that you earn from the IRA itself? As you may know already, any earnings that stem from the IRA is already tax-free, regardless of the type of IRA you have.

Withdrawals

With both IRAs, you will be penalized if you take the money out too early. In both cases, you have to be at least 59.5 years old to make penalty-free “qualified” withdrawals. However, where they differ is how the money is distributed later on in life.

Traditional IRAs will be subject to required minimum distributions (RMDs) once you reach 70.5 years old. These are withdrawals that happen automatically, regardless of if you need the money or not.

Roth IRAs, however, have no such requirement. Thus, you can keep your money in the account and let it grow tax-free for as long as you like. The added benefit is that you can pass it down to your children, along with the tax-free income that comes with it. Once again, the money does have to be in there for five years for it to qualify. After that, however, you can take it out penalty-free.

Utilizing Roth IRA Conversions

As you can imagine, there is a lot of benefit in converting your traditional IRA to a Roth IRA. Since you have no limit on the amount you can contribute, you don’t have to worry about limitations. Also, if you make more than $135,000 as an individual, this is the only way to get money into a Roth IRA since you’re unable to contribute at all.

The reason for doing this is to ensure that you have tax-free income that will appreciate in value for as long as possible. If you are a high wage-earner, this is a massive benefit for both you and your children because you aren’t subject to RMDs or early withdrawal penalties.

Here’s what you need to know about these conversions.

No Limits on Conversions

Even though the IRS limits the amount you can contribute to any IRA in a given year, you can convert as much as you want. Thus, if you’ve paid the max into a traditional IRA for several years, you can convert all of it into a Roth at the same time.

You Still Have to Pay Taxes

At first, you may think that you can claim tax deductions when contributing to a traditional IRA and then avoid taxes on income by converting it to a Roth. Unfortunately, Uncle Sam will take his cut no matter what. You can either pay the taxes when you contribute or when you convert.

Conversion Will Impact Your AGI

One benefit of traditional IRA tax deductions is that they can lower your overall AGI, enabling you to take advantage of various tax breaks. However, when converting to a Roth, that will be counted as taxable income, which could make your AGI higher and push you into a different tax bracket.

Try to Convert With the Same Financial Company

To expedite this process, it’s best to do your conversion with the institution that is currently managing your traditional IRA. While you can transfer funds between organizations, it could make things more complicated and take longer, which could open you up to penalties if the money isn’t converted in time (i.e., with a 60-day rollover).

Bottom Line

Overall, if you’re trying to save money in retirement, then a Roth IRA is one of the best ways to do it. By paying taxes now, you can save yourself from the hassle of doing it during retirement. Also, if you are working on estate planning for your children, then having a Roth IRA will give you a lot more flexibility and freedom. Simply put, you will want to convert as much as you can to get the full benefits of this system.

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Managing your money for retirement can be challenging. One of the best strategies is to use a Roth IRA, but what if you’re ineligible? Learn how to convert your traditional IRA into a Roth and reap the benefits. We discuss everything you need to know about Roth IRA conversions.

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You want to put your money into a Roth IRA for retirement, but you’re making too much money to contribute. Does that sound like you? In this article, I’ll show you why converting your traditional IRA to a Roth is the best option, as well as provide details on how you can maximize your earnings and your benefits.

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If you thought that Roth IRAs were out of reach, you’re wrong. Learn how IRA conversions can help you get more tax-free income for your retirement.

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No matter what stage of life you’re in, it’s never too early to start thinking about retirement.

As a tech professional, you want to make sure that your money is going to be working for you long after you retire, which means that you have to understand the best ways to manage it.

One of the most reliable options is putting your money in an IRA. However, there’s a significant difference between a traditional and a Roth IRA.

Traditional IRAs are beneficial because you can claim tax deductions now, and there are no income restrictions on how much you can contribute (up to the legal maximum). However, when you pull your money out, you have to pay taxes.

Roth IRAs are perfect for high wage earners like yourself because the income is tax-free, and you can pass it down to your children. All of your hard work now will pay off in the future.

But what if you make too much to contribute to a Roth?

Don’t despair. I will show you how you can convert your traditional IRA into a Roth and claim all of the benefits it provides. I will also explain all of the various facets of conversion so that you can go into this process with both eyes open.

Managing your money can feel a bit tricky and overwhelming at times, but I’m here to make it easier for you. Even if you’ve never heard of an IRA before now, you need to read this article. You owe it to yourself and your family to make the most out of your retirement income, which is why conversion can be such a powerful tool.

Are you ready to take charge of your financial future? Follow me to find out how. 

Resources: https://www.rothira.com/traditional-ira-vs-roth-ira

https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
https://twocents.lifehacker.com/what-to-know-about-roth-ira-conversions-1825654230
https://www.statefarm.com/simple-insights/retirement/everything-you-need-to-know-about-roth-ira-conversions

About Woven Capital

Aaron Hatch is a Certified Financial Planner and co-founder of Woven Capital, a fee-only financial planning and investment management firm that specializes in helping people balance life, work, and community. Aaron has been quoted in various publications, including The Chicago Tribune, US News and World Report, and the Huffington Post among others. Aaron can be reached at aaron@wovencapital.net