Roth IRA Conversion
Is It the Right Choice for You?

Moving money from a traditional IRA to a Roth IRA is a "taxable event."  This means that all of the money moving from your traditional IRA to the Roth will be included in your taxable income.   (Exception:  Many high-income people have made non-deductible contributions to traditional IRAs.  If there was no tax deduction when the contribution was made, then only the growth is taxed when you move the money out.)

So the big question is whether it's a good idea to take a tax hit now, move the money into a Roth, and potentially escape tax on all future growth.  This is an attractive opportunity if (1) you have many years left before you will withdraw the funds, (2) if your income is unusually low this year, or (3) it is important to leave the funds to your heirs tax-free.

A few things to consider:

1. Are you able to pay the tax on the Roth conversion with other money?  Exactly how much will the extra tax be?  The tax must be paid from other money, not the money being moved.
2. In order for the growth to be tax-free, the money must stay in the Roth IRA for five years.  Will you need to use these funds in the next five years?
3. Will taking a big conversion now lower your future taxable income so that less of your social security benefits are taxable and your Medicare premiums are lower?
4. Are you considering moving out of California to a state with lower taxes?  Maybe you should wait until you are officially no longer a California resident to convert to a Roth.

Also, here is a popular long-term tax-saving move:  If you are not eligible for a tax deduction for a contribution to a traditional IRA, go ahead and make the contribution any way.  Then, roll the funds from the traditional IRA into a Roth IRA.  This gets around the income level restriction on contributing to a Roth directly, and gives you tax-free (not tax-deferred) growth for the assets.

There are other factors and exceptions which also must be considered.  I recommend that you not make any financial moves involving significant amounts of money until you have run the details past an experienced CPA tax accountant.

Bess Kane, CPA
January, 2019