Aug 01, 2022
By Mike Mesch, ASA Partner at Terry Lockridge & Dunn
Through June 2022 the S&P 500 was down over 20%. This means Roth IRAs are on sale.
If you have never considered a “Roth Conversion” now may be the time to reach out to your advisor. A Roth conversion is when you take a traditional IRA and convert it to a Roth IRA. This results in a taxable event BUT all future growth inside of your Roth IRA will be income tax free. With a long enough time horizon, this could be a very valuable planning technique for your retirement.
Why pay tax now? Well, with the market down this year, you may be able to convert your traditional IRA at this lower value (hence the sale price I mentioned earlier), pay some tax on the lower valuation, and then let the market grow that money tax free in the future.
Tax free money is good for a lot of obvious reasons but one that people often miss is the ability to take out the Roth IRA money during retirement for cash flow purposes without any effect on the taxability of your Social Security Income.
Up to 85% of your Social Security benefit is taxed once your combined joint income exceeds $34,000 per year. Distributions from regular IRA’s will affect your income for this calculation but Roth IRA distributions will not. This is an added benefit of Roth accounts and should be considered in your evaluation of this planning technique.
There are a lot of considerations that must be taken into account for each client contemplating a Roth Conversion. You will want to consider your other current taxable income so you can properly evaluate the immediate tax cost of a conversion. You will also want to make sure your financial advisor considers the effect of the conversion on your long-term retirement plan.
If you would like to discuss the pros and cons of this particular opportunity, feel free to reach out to Mike at email@example.com, or any of the accountants at Terry Lockridge & Dunn or financial advisor representatives at World Trend Financial. They can be reached in Cedar Rapids at 319-364-2945, or in Iowa City at 319-339-4884.