Creating Roth assets is more advantageous than ever. There’s a lot of talk about where tax rates are headed in future years, and most believe the answer is up. Roth IRA assets side-step this risk entirely since qualified withdrawals are tax-free. There’s also no requirement to take Roth-IRA withdrawals during your lifetime, so Roth assets are a terrific way to build a tax-free inheritance for your loved ones.
Even if you can’t contribute to a Roth-IRA, you can convert traditional IRA assets into a Roth-IRA. Many people think that because they earn too much income to contribute to a Roth-IRA, they cannot build tax-free wealth. Fortunately, anyone with traditional IRA assets has the ability to convert some or all of those assets into a Roth IRA, regardless of income.
As advantageous as Roth conversions can be, there are pitfalls to watch out for. The value of assets converted to a Roth IRA are added to your income for tax purposes in the year of the conversion. Converting too much in a given year can result in unintended outcomes such as:
- Elevating you into higher tax brackets.
- Reducing or eliminating a wide variety of tax deductions and credits.
- Triggering penalties like the net investment income tax.
- Increasing the amount of Social Security income subject to taxation.
- Raising your Medicare premiums.
Knowing when to convert and how much to convert requires professional guidance. Deciding when and how much to convert to a Roth IRA by guesswork is a bit like performing surgery while blindfolded – not recommended. If the whole point of a Roth conversion is to save on taxes, going it alone can have the opposite effect. We highly recommend consulting with a tax professional and a financial advisor before making any Roth conversions.