Is a Roth Conversion Right for You?

Traditional 401(k) plans and IRAs are popular ways for many people to save for their retirement. These types of assets do have some drawbacks, though. Distributions from these types of retirement accounts are taxable, and those taxes may limit your income. There is an alternative, however. It’s the Roth IRA.

The Roth IRA offers a way to take retirement distributions on a tax-free basis. While 401(k) plans and traditional IRAs offer tax advantages upfront in the form of deductions for contributions, the Roth IRA is funded with after-tax money. The funds grow on a tax-deferred basis. Assuming you are over age 59½ and the account has been open for at least five years, distributions from a Roth are tax-free.

What if you have a 401(k) or a traditional IRA but really want a Roth? Fortunately, you can convert those funds into a Roth. However, Roth conversions aren’t for everyone. Below are three things to consider if you think a Roth IRA could benefit you:


You’ll need to wait five years to take distributions.

Roth IRAs allow for tax-free distributions, but only if the distribution is “qualified.” What makes a distribution qualified? First, you must be either 59½ or older, dead or disabled. Additionally, your Roth has to have been open for at least five years. If it has not been open for five years, the distribution could be taxable.

Will you need distributions from your IRA or 401(k) within five years? If so, you may not want to convert those funds into a Roth, as you could sacrifice the primary benefit of the conversion.


You may need non-IRA assets to pay taxes.

Remember, during a conversion you are transitioning funds from an account with taxable distributions to one with tax-free distributions. The IRS doesn’t let you simply avoid those taxes. After the conversion, you must pay taxes on the growth and any deductible contributions that were converted out of the traditional IRA.

One strategy to cover the tax cost is to use non-IRA funds. While you have the option to withhold the taxes from the conversion, that strategy would reduce the amount that actually ends up in the Roth. By using non-IRA funds to pay the taxes, you maximize the amount in the Roth, thereby increasing your potential tax-free income.


You’ll need to make allocation decisions with the Roth.

Converted funds usually enter the Roth IRA as cash. You then have the ability to choose your allocation and investments. If you are thinking about a Roth conversion, this could also be a good time to re-evaluate your investment strategies.

For instance, using an annuity inside a Roth could be an effective way to generate guaranteed lifetime income. Annuities offer a few different ways to do this, and if you implement the strategy inside a Roth, that income is also tax-free.

Think a Roth conversion may be the right strategy for you? Contact us at TB Financial. We can help you evaluate your objectives and needs, and then develop a strategy. Let’s connect soon and start the conversation.


This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

16111 – 2016/9/20

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