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ROTH IRA Conversions

If you own an Individual Retirement Account (IRA), perhaps you have heard about Roth IRA conversions. Converting some (or all) of your accumulated IRAs to a Roth IRA might be a sound financial move, depending on your situation.

First, understand this article is for informational purposes only; it is not a replacement for sitting down with a financial advisor and completing a sound plan. A financial professional should be consulted before attempting any type of Roth conversion, as they have the responsibility if you act through them for issues that might arise. Their job is to understand and apply the tax laws that are currently in place, as well as update you when tax laws concerning your planned conversions change.

Also, Roth conversions have been under much scrutiny during the past few years. Congress has considered legislation that would prevent high-income Americans from Roth conversions. While no action has taken place, it is possible that Roth rules may change in the future.


Every Roth IRA conversion is based on the belief that your federal and state income tax rates will be higher in the future than they are now. If you hold this belief, then you may want to consider a Roth conversion.

Once you are 591⁄2 and have had your Roth IRA open for at least five calendar years, withdrawals of the earnings from your Roth IRA are exempt from federal income taxes. In addition, once five calendar years have passed, you can withdraw your Roth IRA contributions tax-free and penalty-free.

Under current IRS rules, if you are the original owner of a Roth IRA, you will never have to make mandatory withdrawals from your account. Additionally, you can keep making contributions to a Roth IRA as long as you continue earning income.

Currently, if your federal tax filing status is married filing jointly and your 2022 adjusted gross income (AGI) is $214,000 or less, you can contribute a maximum of $6,000 each to your and your spouse’s IRA, and then $7,000 when you are age 50 or older. The maximum contribution is also available to single filers with an AGI of $144,000 or less. Depending on how high your AGI is, the amount you are able to contribute may change. If your income is higher than the allowed thresholds but you still wish to make contributions, see our posting regarding Back-Door IRAs.

There are reasons you may not want to convert your Traditional IRA to a Roth.

1) A Roth IRA conversion cannot be undone. The IRS regards it as a payout from a
Traditional IRA prior to that money entering a Roth IRA, and the payout represents taxable income. That taxable income stemming from the conversion could have tax consequences during the year when the conversion occurs.

2) You must have the liquid assets to cover the tax bill that will incur as a result of converting your Traditional IRA to a Roth IRA. If you live here in Wisconsin and have $100,000 in Traditional IRAs, that $100,000 Roth conversion will be added to your current annual income in determining your federal and state tax liability. In most cases, this is about 22% (or higher) in federal taxes and 7.65% for state.

Generally speaking, the earlier in life you convert a Traditional IRA to a Roth IRA, the better. Your income may rise as you get older, so you could finish your career in a higher tax bracket than the one you were in when your employment began. These conditions reinforce the key arguement for converting to Roth: it is better to pay taxes on IRA contributions today, than on IRA withdrawals tomorrow.

On the other hand, since many retirees have lower income levels than their end salaries, they may retire at a lower tax rate. This is a key arguement against Roth conversion.

You could also choose to have it both ways. As no one can reliably predict the future of American taxation, some people contribute to both Roth IRAs and Traditional IRAs, figuring they can be
at least half right, regardless of whether taxes increase or decrease. You can also do partial
Roth conversions; this is where you only make a partial conversion and pay what could be a more palatable tax rate on your converted amounts. However, we typically recommend against converting a Traditional IRA, paying the taxes using the proceeds from the IRA, and then converting the remainder into a Roth IRA. However, this depends on individual circumstances (another reason to work with a financial professional).

If you do go Roth, your heirs may receive tax-free distributions. Also, Roth IRAs can prove to
be very useful estate management tools. If IRS rules are followed, Roth IRA heirs may end up with a tax-free inheritance from the account. In contrast, distributions of inherited assets from a traditional IRA are taxed under the rules of inherited IRAs.

Call us or set up an appointment through our website if you have any questions or require any help or clarification.

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