Why Convert to a Roth IRA?

Why Convert to a Roth IRA?

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About the Author

Ostrom retired from the Air Force in 2000 after serving in a variety of personnel, education and training, and executive officer assignments. His assignments included tours in North Dakota, Florida, Korea, Australia, and the Pentagon. His final assignment was on the Joint Staff, writing and championing legislation related to joint officer personnel management issues. He earned numerous decorations and awards over his Air Force career.

After Air Force retirement, Ostrom was a practicing investment advisor at a large investment firm and a bank. He specialized in working with clients developing, implementing, and managing investment plans and portfolios.

A native of San Antonio, he earned a Bachelor of Arts and Master of Arts and is a graduate of the Royal Australian Air Command and Staff College and the U.S. Air Command and Staff College.

Ostrom joined the MOAA staff in 2006. His responsibilities include researching and writing articles and answering member inquiries regarding military benefits, health care, survivor issues, and financial concerns. He also travels extensively to discuss these matters with servicemembers and retirees and their families.

The difference between a traditional and Roth Individual Retirement Account (IRA) is when you pay taxes. Roth accounts require tax payment now. Traditional accounts delay the taxes until retirement.

Why would you consider converting your traditional account to a Roth, especially after you've paid no tax on traditional account contributions so any untaxed money moved to a Roth account requires tax payment upfront?

  • A Roth account does not have Required Minimum Distributions (RMDs) at age 70½ as a traditional account does. Maybe you don't need the RMDs or you want to pass assets to heirs. By the way, Roth 401(k)s and Roth Thrift Savings Plans do have RMDs.
  • You want to lower your future income level thereby reducing the taxes on Social Security benefits or your Part B Medicare premiums. Distributions from a Roth are tax-free and do not count as income. Traditional account distributions count as taxable income in the year withdrawn.
  • You might have a year with sizable itemized deductions, and the taxes from a conversion to a Roth account will be offset by the deductions. Maybe you have carry-over deductions or tax credits that will offset the conversion taxes. 
  • Some is better than none - you do not have to convert all your traditional account money. Partial conversions to a Roth over several years will reduce future taxable income by lessening your RMD amounts.
  • Perhaps you want to take advantage of the lowered tax rates or higher standard deduction under the tax reforms before tax rates revert back to 2017 levels in 2026.

For those thinking of a backdoor Roth IRA conversion: A backdoor conversion is for people who have too much income to contribute to a Roth IRA. Instead, they contribute to a traditional IRA, and because they make too much money to deduct the contribution to the traditional IRA, the money in the traditional account is taxed. Then, they convert the traditional taxed IRA money to a Roth IRA - circumventing the Roth IRA up-front contribution limitation due to their higher income, and they don't usually owe taxes on the conversion.

The backdoor traditional IRA-to-Roth IRA conversion only works if you have a traditional IRA with only nondeductible contributions. If you have traditional IRAs with deducted contributions, you have to aggregate the monies in all your traditional IRAs when you covert to a Roth IRA. Bottom line: You can't cherry-pick only the taxed traditional IRA monies for conversion to the Roth IRA. You will owe some taxes on the conversion.

 

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