In this video we break down the important things to know if you're considering converting to a Roth IRA.
Keep in mind, we are in a historically low tax rate environment. Paying your taxes now will allow your money to grow tax deferred, and the growth can be accessed tax free presuming it's a qualifying distribution. Also, to help manage your tax liability, you may choose to convert just a portion of your assets. There is no limit to the number of conversions you can make, so you may convert smaller amounts over several years.
Full Transcript:
Erin: Hey, Ryan, it's really good to see you. I have an important question. I do, and a lot of other people. Should I consider a Roth conversion? If you're considering converting an IRA to a Roth, we're going to break down everything that you need to know. But first, Ryan, I want to talk about a common misconception, which is the deadlines. A lot of people think you can do a conversion up until the tax filing deadline.
Ryan: Yeah. That is a common area of confusion. So contributions could be made up until the tax filing deadline, but when it comes to conversions, you've got to do it before December 31st.
Erin: All right. Glad we sorted through that. So I want to know, how does this work? If I convert my IRA to a Roth, I will potentially be facing a pretty big tax bill come April of next year.
Ryan: Well, it depends. So, it depends on how much you might convert. It also depends on what your other income is, and so whether or not you should even convert in the first place is going to depend on your particular circumstances. But keep in mind, you can do a full conversion, you can do a partial conversion instead. You can pick and choose how much you convert on an annual basis.
Erin: One of the reasons that we're doing this video now is to help walk through some of the reasons why maybe now could be a good time. And one of those being, Ryan, the fact that we are in a historically low tax rate.
Ryan: Yeah. As you can see right here, by historical standards, tax rates are quite low, and tax rates are going to increase. We already know that the Tax Cuts and Jobs Act is going to sunset here in just a few years, and so taxes are going to go up and a lot of people don't think that their taxes are going to rise as much as they might rise in the future, so definitely something to plan for.
Erin: Right. And one of the reasons why we can maybe bank on taxes going up, Ryan, is... This gives me so much anxiety to look at the US debt clock, but we just hit $31 trillion. So we know that the government has to come up with that revenue from somewhere, either by reducing spending, which they don't like to do, or increasing taxes, right?
Ryan: Yeah, exactly. I mean, it's not popular for politicians on either side of the aisle to reduce benefits, but somehow this debt needs to get paid down, and the only way to do it is either to reduce benefits or to increase revenue, and the way you increase revenue is to increase taxes. But yeah, we're $31 trillion in debt, and you look at that on usdebtclock.org and those numbers just continuing to go up. Somehow, we've got to find a way to pay that down.
Erin: Right. So let's walk through, then, some of the common considerations if you are considering a Roth conversion. We've talked about tax brackets, Ryan. What else?
Ryan: Well, there's really a lot to consider here. So for instance, one of the time periods where you might want to consider doing a Roth conversion might be in a year where your income isn't as high as it normally is. Another time period where you might want to consider this is right in the time period when you retire up until the time that you have to start taking out your required minimum distributions. Remember that this is money that you're going to pay taxes on eventually anyways, so it's just a matter of putting you in control and helping you make the decision on when you're going to pay those taxes.
Erin: Right. And one other thing that I wanted to hit on, I think you kind of mentioned it. It is a very common misconception too that you'll be in a lower tax bracket when you retire.
Ryan: And it could be, but I can say that for a lot of people that have been very diligent and have saved very well over the years in pre-tax retirement accounts, oftentimes they're in for a surprise. And so, yes, you may be in a lower tax bracket, but again, if you've done a really good job of saving, you might not.
Erin: Right. And one last kind of question about process. I've heard of Roth ladders. Who are they for? What are they?
Ryan: I would say a Roth ladder is really for most people. So whether you should do a Roth conversion is something that for a lot of people, you should consider on an annual basis. How much should you convert? Assuming that you should maybe convert any, how much should you convert this year, maybe next year, maybe the following year, but decide on an annual basis how much makes sense. So for example, if you could realize a little bit more income and still stay within the same tax bracket, that might be a time when you want to go ahead and pay the tax and get that done.
Erin: Right. Well, I think what I'm learning here, Ryan, is that there is no cookie cutter answer. Clearly, a lot of considerations. So somebody would like you to walk through whether a Roth conversion is right for them. What's the best way to reach you?
Ryan: Best way is you could call (714) 462-9155. You could also email me at ryan@cravitzfinancial.com or simply go to the website, cravitzfinancial.com, go to the contact page, put in your information, and we'll get back with you.
Erin: All right, Ryan. Thank you.
Ryan: Thank you.