Retirement Planning - Convert IRA to Roth IRA?

[hcoles]

Some here may be in a similar situation. Currently have a Simple IRA and considering how to deal with it going forward. What are the pros and cons to converting?
Roth IRA Pros:
- no forced distributions
- better for those that inherit the Roth vs. Standard IRA
- take distributions tax free

[biosurfer1]

I have looked into quite a bit too and the problem I have found is it's so specific to each individual, it really is worth it to visit a financial advisor, fee only of course, and one with retirement tax experience.

So much of it depends on your current tax rate, your expected withdrawals, your account totals, etc.

From what I have found it seems quite worth it if you plan carefully for it and make sure everything is in line. I think more people avoid doing because often it's pay now for bigger benefit later, which lots of people don't like for some reason.

[masraum]

WHen you convert, you have to pay taxes on the amount at your current rate, right.

So if you have $100k in the IRA and you want to convert, and you're in the 25% bracket, then you'll have to pay $25k to Uncle Sam.

If you are on or ahead of schedule WRT your retirement savings, then it's nice to have a mix of pre and post tax savings available, but converting form pre to post will probably cost a bundle.

[Crowbob]

It will cost a bundle to convert which means the farther out your mandatory minimum dispersal begins the more likely you will have been able to regain the loss. I think now that mandate begins no later than age 75.

[stevej37]

Isn't there a yearly maximum that one can add to their Roth account?

I know at one point ed Jones told me I couldn't add more one year.

[hcoles]

There seems to be a lot of "fine print" as it relates to Roth IRA's and converting.
To start with there are three obvious advantages:
- tax free withdrawals
- no required distributions
- tax free growth

[Noah930]

I think biosurfer is right when he writes that the decision is too complicated and individual to give you proper advice on this forum. I also think that Masraum is correct on the taxation today of your withdrawl at your current marginal tax rate. So I think to put it somewhat simplistically: what is your current tax rate? What do you anticipate your tax rate to be when you're retired?

I used to think that taxes only rise as time goes by. So I'd rather be taxed today, as opposed to decades later. But I've also come to realize that we live in a country in which the lower end on the income spectrum will never be taxed (on income). So I'd rather pay 22 or 24% income tax when I'm retired, as opposed to 30-some percent today.

[wdfifteen]

Try to estimate your tax situation now vs in the future. If your income will be lower after you retire it seems it would be smart to wait and pay the tax on it then.

[masraum]

Originally Posted by stevej37

Isn't there a yearly maximum that one can add to their Roth account?

I know at one point ed Jones told me I couldn't add more one year.

I believe the current maximum (it goes up every once in a while) is $7k.

But there is a conversion process. If you have a standard IRA and you want to convert to a Roth IRA, you can do that. It bypasses the max yearly contribution. It's because you aren't really contributing to an IRA. You have an IRA and you are just changing that IRA from one type to another type of IRA.

https://www.investopedia.com/terms/i/iraconversion.asp

What Is a Roth IRA Conversion?

A Roth IRA conversion is a transfer of retirement assets from a Traditional, SEP, or SIMPLE IRA into a Roth IRA, which creates a taxable event. A Roth IRA conversion can be advantageous for individuals with large traditional IRA accounts who expect their future tax bills to stay at the same level or grow at the time they plan to start withdrawing from their tax-advantaged account, as a Roth IRA allows for tax-free withdrawals of qualified distributions.
Key Takeaways

A Roth IRA conversion involves transferring retirement funds from a traditional IRA or 401(k) into a Roth account.
Since the former is tax-deferred while a Roth is tax-exempt, the deferred income taxes due must be paid on the converted funds at that time. There is no early withdrawal penalty.
This strategy makes sense if a saver believes that the deferred tax liability in the traditional account will grow as retirement approaches, where it is better to pay those taxes now than later.

How a Roth IRA Conversion Works

A conversion may be accomplished by a rollover of assets directly between the trustees of the traditional and Roth IRAs, or by the IRA owner distributing the assets from the traditional, SEP, or SIMPLE IRA and rolling over the amount to the Roth IRA within 60 days of receiving the distributed amount.

Any such conversions should be done with due diligence, possibly consulting a financial planner or personal tax professional, as there may be major tax implications if not done appropriately. This is even more important because a Roth conversion completed after Dec. 31, 2017, can no longer be recharacterized—in other words, it can't be reverted back to a traditional IRA later.

[hcoles]

Good input thanks. The long and short of it .... it's complicated. I've sent a question into my tax accountant to see what she advises.
Yes, I think you can put $7k in to a Roth every year at this point. That might be sort of a free-bee.

[jyl]

Originally Posted by Noah930

I think biosurfer is right when he writes that the decision is too complicated and individual to give you proper advice on this forum. I also think that Masraum is correct on the taxation today of your withdrawl at your current marginal tax rate. So I think to put it somewhat simplistically: what is your current tax rate? What do you anticipate your tax rate to be when you're retired?

I used to think that taxes only rise as time goes by. So I'd rather be taxed today, as opposed to decades later. But I've also come to realize that we live in a country in which the lower end on the income spectrum will never be taxed (on income). So I'd rather pay 22 or 24% income tax when I'm retired, as opposed to 30-some percent today.

I’m no expert on IRAs but what you said is my understanding of it as well. Also note you can move to a lower tax state for retirement.