As a financial planner, when I sit down with my clients, the question invariably comes up as to whether it would be a good idea to convert a traditional IRA to a Roth IRA. As I consider carefully each of my client’s unique financial circumstances, my answer is usually, “It depends.”
IRA financial decisions depend on age, taxable income, income tax rates, and a few other variables. If you've been thinking about converting your traditional IRA to a Roth IRA this year, it may be an appropriate time to do so. The reason why is federal income tax rates were reduced by the Tax Cuts and Jobs Act passed in December 2017, so this might be a good financial strategy for you. Converting your IRA may now be "cheaper" than in past years.
In 2018, anyone can convert a traditional IRA to a Roth IRA. There are no income limits or restrictions based on your tax filing status. For the year of conversion, you generally have to include the amount you convert in your gross income, but any nondeductible contributions you've made to your traditional IRA won't be taxed when you convert. (By the way, you can also convert SEP IRAs and SIMPLE IRAs, that are at least two years old, to a Roth IRA.)
Is It Easy to Convert?
Converting these types of IRAs to a Roth IRA is very easy. Simply contact your existing IRA financial provider . Let them know that you want to convert all or part of your traditional IRA to a Roth IRA. Your provider will provide you with the necessary paperwork to complete. If you wanted to, you can transfer or convert your traditional IRA assets and complete the IRA process with a new IRA provider as well.
In the case of working with a trustee/custodian of your traditional IRA, you can have the funds in your traditional IRA distributed to you, and then roll those funds over to your new Roth IRA within 60 days of the distribution. The income tax consequences are the same regardless of the method you choose.1
What Are the Contribution Rules?
In 2018, the conversion rules can be used to contribute to a Roth IRA if you would not otherwise be able to make a regular annual contribution because of the income limits. The rule in 2018 is you can't contribute to a Roth IRA if you earn $199,000 or more and are married filing jointly, or if you're single and earn $135,000 or more. Simply make a nondeductible contribution to a traditional IRA, then convert that traditional IRA to a Roth IRA. Keep in mind, however, that you'll need to aggregate the value of all your traditional IRAs when you calculate the tax on the conversion. It’s a great way to build up your financial nest egg. You can contribute up to $5,500 to all IRAs combined in 2018, or $6,500 if you're 50 or older.
1If you choose to receive the funds first and don't transfer the entire amount, a 10% early withdrawal penalty may apply to amounts not converted.
Alan Battles is a Salt Lake City, Utah fee-only Registered Investment Advisor (RIA) fiduciary and financial planner. Brighton Wealth Management, Inc. specializes in providing objective financial planning and investment management to help clients build, manage, grow, and organize their assets during life’s transitions.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.