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To Roth or Not to Roth - That is the Question

By: Jim Spindler, CFP®, Senior Vice President and Wealth Advisor at Girard, a Univest Wealth Division

Have you considered transitioning a traditional IRA to a Roth IRA? One potential silver lining to the recent market volatility is that the tax impact of doing that conversion could be lower since the value of your investments may be down. When you complete a Roth conversion, the amount of the conversion is taxable as ordinary income. Typically, it is preferable for those taxes to be paid with funds outside the IRA.

How should you decide if a Roth conversion is right for you? Here are several important items to consider:

Time Frame – The longer the investing horizon you have, the more powerful the tax-free growth potential of a Roth IRA can become. Since you pay taxes when doing the Roth conversion, any future growth on the Roth IRA will be tax-free when disbursed, if you meet specific age and holding period requirements. The longer the funds have the opportunity to grow tax-free, the more powerful this benefit has the potential to become.

Taxes – Since you will pay income tax on the converted amount, consider what tax bracket you are in when making the conversion compared to where you might be in the future. If you believe your tax rate will be higher in the future, you may want to pay the taxes on the converted amount while you are in a lower tax bracket. Also, if all your retirement assets are in tax-deferred accounts, having some tax diversification when making disbursements in retirement can be beneficial. Lastly, business owners may be able to use the current disruption to their business from the effects of COVID-19, if applicable, as an opportunity to convert to a Roth IRA with a lower tax impact.

RMDs – With traditional IRAs you eventually need to take a Required Minimum Distribution (RMD) every year whether you need the funds or not. Since a traditional IRA grows tax-deferred, the disbursements are taxed as ordinary income when taken. RMDs are not required for Roth IRAs so the funds can remain invested on a tax-free basis until needed or passed on to your beneficiaries.

SECURE Act – One significant change for non-spousal IRA beneficiaries when the SECURE Act was passed at the end of 2019 was the elimination of the stretch IRA. This change requires the recipients to disburse the funds of an IRA within ten years of the death of the IRA owner. This rule also applies to Roth IRAs. However, with a Roth IRA, the funds will be passed on to your beneficiaries tax-free instead of them paying taxes on the disbursements as they are made. That means your beneficiaries will lose less of their inheritance to taxes.

With markets down from their all-time highs, this can be the perfect time to consult with your wealth advisor and tax professional to see if converting a traditional IRA to a Roth IRA makes sense for your financial plan and allow for you, and possibly your heirs, to keep more of what you have earned.


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This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.