The Case for Roth IRA Conversions in a Volatile Market

By: Steven J. Rosenthal, CPA, CFP, JD




Roth IRA accounts are desirable retirement savings vehicles for many retirees. The earnings in Roth accounts that meet IRS requirements are tax-free and are never subject to required minimum distributions, features not provided by traditional IRAs. The compound tax-free earnings in Roth accounts can bolster a retiree’s total returns over time. If a retirement saver wishes to convert a pre-tax (i.e., previously deductible) traditional or rollover IRA to a Roth IRA, there are no restrictions to the conversion based on income, although tax may need to be paid on built-in gains at the time of conversation.


The case for conversion makes sense especially when the value of retirement assets has been temporarily diminished, as is likely the case with today’s volatile markets. If a retirement saver converts $100,000 of pre-tax IRA assets to a Roth IRA and is in the 32% tax bracket, the tax liability associated with that conversion is $32,000. However, if the value of those assets has declined to $80,000, the tax liability on conversion is reduced to $25,600, a $6,400 tax savings that can provide for a larger retirement nest egg.


This example is for illustration purposes only. The ideal amount of IRA assets that should be converted as part of a tax strategy will vary depending on an individual’s total amount of retirement assets, their tax bracket, the tax basis of existing retirement assets, projected future tax rates, projected years in retirement, and estate planning considerations among other considerations. Fulcrum Wealth Advisors can help retirement savers choose the best strategy for these conversions given their individual circumstances.


For more details on the tax implication of this strategy please see the discussion at: https://www.irs.gov/pub/irs-pdf/p590a.pdf



 

Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. Branch: 10940 NE 33RD PLACE, STE 210, BELLEVUE, WA 98004


Investment advisor representative of and securities and investment advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer, and Registered Investment Advisor. Cetera Advisor Networks is under separate ownership from any other named entity. Additional Investment advisory services are offered through Fulcrum Wealth Advisors, LLC. Fulcrum Wealth Advisors LLC is a registered investment advisor in the State of Washington. / IRS Circular 230 Disclosure: Fulcrum Wealth Advisors does not provide legal, tax, or accounting advice. Clients of Fulcrum Wealth Advisors should obtain independent tax advice based on their particular circumstances.