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Is Now the Right Time to Consider a Roth Conversion?

Individual retirement accounts (“IRA”) come in different flavors, but the most common are traditional IRAs and Roth IRAs. 

Contributions to a traditional IRA are deductible and withdrawals – both original contributions and the earnings on them – are taxed as ordinary income. Generally, the owner must take required minimum distributions starting at age 72.

Contributions to a Roth IRA are not deductible and withdrawals– both original contributions and the earnings on them –are tax-exempt, as long as the taxpayer is over 59 ½ and the funds have been held in the Roth IRA for at least five years. There are no required minimum distributions.

Total IRA contributions for the year are limited. For example, in 2023 for a taxpayer aged 50 or over, the limit is $7,500. For Roth contributions, the limit is phased out for income over a set threshold. For example, in 2023, a married taxpayer filing jointly encounters the limit once adjusted gross income equals or exceeds $218,000. Once income equals or exceeds $228,000, no Roth contribution is allowed.

However, there’s no income limit on conversions from a traditional IRA to a Roth IRA. The drawbacks are that converting a traditional IRA to a Roth IRA is treated as a taxable distribution from the IRA, and the conversion must be for the entire amount of the account. This means that the funds to pay the tax should come from outside the retirement accounts to maximize the benefit.

In many situations, the current tax burden caused by the conversion gives taxpayers pause. But the current situation with reduced stock values provides an opportunity – a bright point in a gloomy market. The reduced value of stocks means that a conversion would incur less tax. And holding the stock in a Roth IRA means that future earnings – such as a market recovery – produce an increase in value that would permanently escape taxation.

With the current volatility in the stock market, taxpayers have a planning opportunity. They should discuss a conversion with their financial advisor, have their tax advisor calculate a projection of the federal and state income taxes that would be due, and plan for the liquidation of sufficient assets to pay the tax.

We at Gettry Marcus are available to assist you with a Roth conversion. If you would like additional information please contact your Gettry Marcus Advisor.