Things to Think About Before Making a Roth IRA Conversion

Old couple having coffee"The Roth IRA, with its unique tax advantages, can be a powerful financial-planning tool. However, rolling funds from a traditional IRA into a Roth is not the right move for everyone."

The Motley Fool's article, "5 Things to Consider Before Making a Roth IRA Conversion," says that although Roth IRA conversions are popular, there are a few key things to consider before moving forward. Here are the five considerations identified by the article:

  1. Your tax bracket. These days it's not unusual for retirees to be in a higher tax bracket during retirement. However, many of us have the option of investing in a Roth IRA, which doesn't offer an up-front tax break—but lets you withdraw funds in retirement tax-free. If you think you are going to be in a higher tax bracket when you retire, you might consider converting some or all of your retirement savings to a Roth before you retire. Converting some or all of your traditional IRA money to a Roth IRA will also give you some tax diversification in retirement to hedge against future changes in tax rates and related rules.
  2. Estate planning. One of the great things about a Roth IRA is that it isn't subject to required minimum distributions (RMDs) at age 70½, unlike a traditional IRA, where you must withdraw an IRS-mandated amount annually at that age. Plus, it's subject to income taxes. Roth IRAs can continue to grow tax-free for as long as you live, and if your beneficiary is your spouse, he or she can roll over the account and make the Roth IRA his or her own with the same rules (non-spousal beneficiaries are subject to an RMD, but that distribution isn't taxed). In addition, non-spousal beneficiaries can take the RMDs over their entire life expectancy. This is a terrific benefit for younger beneficiaries like children or grandchildren.
  3. Be ready for the tax hit. The big minus for a Roth IRA conversion is that any funds you roll over will be subject to income tax in the year of the conversion. That means older folks should consider whether they can cover the tax bill and generate enough investment growth to offset the impact. Plus, there may be other considerations—like estate planning—that become more important than "payback" concerns.
  4. College financial aid. If you have college-age children who will be applying for financial aid, you may want to avoid Roth conversions when their aid is calculated. The extra taxable income could affect their eligibility or the amount of aid.
  5. Stock market declines. A drop in the stock market may give you a great opportunity for a Roth IRA conversion and get you more bang for your buck. You will be converting a lower amount and paying less in taxes. If you're thinking about rolling over your traditional IRA, consider taking advantage of the stock market correction by converting a larger portion of your old account, or think of it as another way of "buying low and selling high."

Converting your traditional IRA to a Roth IRA is a powerful tool that can provide financial planning options for many. But before you make a Roth conversion, consider the pros and the cons.

Reference: Motley Fool (February 27, 2016) "5 Things to Consider Before Making a Roth IRA Conversion"


How to Manage the Bumps in the Road to Retirement

Roadblocks-to-Retirement-AheadA new TD Ameritrade survey says that bumps and detours along the road to retirement are the norm, not the exception, with two-thirds of Americans claiming their retirement planning has been disrupted by anything from major health bills or bouts of unemployment to business setbacks or divorce. The toll in lost retirement savings: an estimated $2.5 trillion. Still, however predictable the results, studies like this can still serve a useful purpose by reminding us of something we should already know but often forget: namely, that we’ll have a better shot at weathering and recovering from financial disruptions if we factor them into our planning ahead of time.


The article, titled “Retirement Interruptus: 3 Ways to Prevent Disruptions From Derailing Your Retirement Plans,”from the website Real Deal Retirement, gives us three ways to stay on track along the road to retirement:


1. Consider Alternate Retirement Realities. Remember that an assessment of your retirement prospects from a retirement calculator doesn’t mean that your retirement’s going to go precisely to that plan. Just like the weather forecast, things can change. “The best-laid plans of mice and men…”


With that in mind, you should run through a variety of different scenarios to get a feel for how you might do under a variety of different conditions, such as higher inflation or lower investment returns. The article suggests you look at some worst-case scenarios like extended unemployment when you aren’t able to save, forced early retirement, or an accident with large medical bills or other expenses in retirement that can take a big bite out of your nest egg.


2. Make Certain You Have a Safety Net. Once you have an idea what one of these alternatives may look like, look for ways to alter your planning to mitigate some of the possible damage. The thought most people have is to boost savings balances by investing more aggressively. This may be okay if you’re currently investing very conservatively (for example, with CDs and bonds). However, if you already have a very well-balanced portfolio that works with your risk comfort level, getting more aggressive could backfire and leave you even more vulnerable to a market crash.


If you’re still working, the article advises that a better route is to look for opportunities to save more—even if you’re very near retirement. You can still try to save a little more of your salary each year, which can significantly boost retirement account balances and make it easier for you to recover from a setback. This is backed up by the survey, which found that people who’d experienced a financial disruption said that saving a greater proportion of income (44%) and getting an earlier start on saving (36%) were the things they suggest to others in a similar situation.


If you’re already retired, spending less is the focus, instead of saving. Examine how you can eliminate spending without creating a major negative impact on your standard of living. Create a retirement budget that divides your spending into essential and discretionary categories to see what kind of wiggle room you have and identify possible areas to cut.


3. Get Going! If you have had your retirement planning disrupted, take corrective action right away. Waiting with the hope that the setback may just be temporary or that you might be able to fight your way through without changing things is just going to make it worse. The article suggests reducing spending, and that’s what 79% of the people in the survey did. However, for many—particular those who are unemployed—the retirement contributions may be one of the first things to go. Using your savings should always be a last resort, and if you must do this, try to pull money out of your non-retirement accounts first. If you are forced to tap retirement accounts, try to minimize your taxes and early withdrawal penalties.


If you have a set-back when you’re retired, immediately analyze your retirement budget and pinpoint ways to cut back your withdrawals. The article warns that if you experience a hit to your nest egg—especially early into retirement—you can significantly increase the odds of running out of money during your lifetime. Remember to work those retirement calculations to get a sense of what level of spending you can reasonably expect to maintain without going through your money too quickly.


We all know that every road has some bumps and potholes, and some can’t be avoided. Talk with an experienced estate planning attorney and create a solid plan with some “what ifs” baked in for your retirement. If you add these into your planning and respond quickly if they occur, you should be able to minimize the damage.


For more information about estate planning, please visit my estate planning website.


Reference: Real Deal Retirement, “Retirement Interruptus: 3 Ways to Prevent Disruptions From Derailing Your Retirement Plans.”



Estate Planning with Roth IRAs

RothLegacy and estate planning with a Roth IRA may sound like a no-brainer. Roth IRAs intrinsically make phenomenal transfer of wealth vehicles. With reduced estate taxes and no income tax for heirs to pay on withdrawals, establishing a Roth IRA or even converting to one from a Traditional IRA seems to be a simple decision. However, as with most things financial, estate planning is not as simple as it is often portrayed. Below are three tidbits to keep in mind when planning for the financial security of future generations.

A recent Benzinga article, titled “Legacy And Estate Planning With A Roth IRA, says you should think about not only the account holder's tax situation, but the heir’s as well and consider the tax burdens your heirs may inherit. When estate planning, keeping all parties in mind is important.

The article recommend converting to a Roth when the estate owner's standard of living seems secure without the IRA. When an IRA is more of an emergency fund and a wealth-transferring vehicle, the objective is to try to ensure the maximum after-tax wealth for heirs. Only when this happens does the objective shift from personal security to the security of future generations.

Along with this, know that IRAs are controlled by regulations to ensure that the account contents are properly accounted for and the taxes paid. Inherited retirement accounts fall under a different set of regulations after the original account holder passes away. Even though the basic differences between Roth IRAs and Traditional IRAs remain, it’s critical to know that second-generation accounts are not treated exactly the same as first-generation accounts. Coupled with this is the fact that not all Traditional IRAs or all Roth IRAs are identical. As a result, you need to understand the specific regulations of your individual account. You can’t just rely on these typical situations described. So individual results may vary!

The most important thing to remember when planning your financial future, according to the original article, is that the more you know and understand regarding your particular financial situation, the better informed your decision-making process becomes.

Take the time now to invest in yourself and take ownership of your financial health.

For more information about estate planning, please visit my estate planning website.

Reference: Benzinga (January 30, 2015) “Legacy And Estate Planning With A Roth IRA”


Financial Success in The New Year / York, PA

Financial-SuccessSo what is the No. 1 thing Americans need to do to find success with their money in 2015?

They should be looking ahead to the future — and regularly contributing to their savings.

One of the best things you can do in 2015 to set yourself up for financial success in the future is to be strategic with your savings. Save as much money as you can in a Roth IRA.

According to a recent article at gobankingrates.com, titled CNBC’s Sharon Epperson on Why You Need a Roth IRA in 2015, in the event of an emergency make sure you're able to withdraw your contributions at any time without incurring penalties or fees. This is also a terrific way to save for retirement, because you might be in a higher or lower tax bracket when you’re in your 60s. Who knows?

With a Roth IRA, typically you can withdraw money tax-free after age 59½. If you qualify for a Roth, you could save up to $5,500 in 2015, or $6,500 if you’re 50 or older. Don’t forget that you have until April 15th to make your contributions for 2014.

Another type of Roth account for retirement savings is a Roth 401(k). This version doesn't have any income limits. If your job has this type of retirement plan (many large employers are expected to offer a Roth 401(k) option in 2015), you can contribute up to $18,000 next year (or $23,000 if you’re 50 or older).

Unlike a traditional IRA or 401(k), Roth contributions won’t reduce your taxable income; however, your overall tax savings (tax-free withdrawals) are likely to be much greater when you retire.

Reference: gobankingrates.com (December 6, 2014) CNBC’s Sharon Epperson on Why You Need a Roth IRA in 2015


Answers to Questions about Roth IRAs / York, PA

RothThe decision to execute a Roth conversion and generate taxable income is more complicated than it may seem at first blush — especially when you consider it in the context of your estate plan. You're essentially making a bet that paying tax today is better than having someone else pay any income and/or estate taxes on it in the future. Before you decide to convert, be sure you and your financial adviser have answered the following three questions:

1. Will your Roth outlive you? In estate planning, the top two reasons for Roth conversions are to bequeath tax-free assets and to reduce your taxable estate. It’s critical to project your spending lifestyle relative to your net worth to understand how your assets may be used in retirement. This allows you to see what assets are likely to be part of your remaining estate.

The MarketWatch article, "When a Roth conversion is right for your estate — and when it isn’t," explains that if you project you’ll spend all of your IRA assets in retirement, the decision to convert will be based on marginal tax rates over your lifetime. If you think your Roth will outlive you, make sure the conversion tax implications outweigh the long-term savings for the person who will inherit the account. If you throw the beneficiary into a higher tax bracket with the inheritance, he or she may be better off if you take the tax hit now at your lower tax rate. But if the beneficiary’s tax rate at the time of the inheritance will be lower than your current tax rate, conversion may not be worth it. Talk with your estate planning attorney about possibly leaving the assets in a traditional IRA.

2. Is there a plan to maximize the Roth benefit? If you plan well, the benefits of a Roth conversion could span multiple lifetimes, so it’s very important to communicate this to your spouse to extend the account’s tax-free growth.

3. Does your estate benefit a charity? Charities generally don’t pay any income taxes on donations, so a traditional IRA—rather than a Roth—is a terrific asset to leave to charity. When you own an IRA, it’s like you have a joint account with the U.S. Government, as taxes are owed on the money that’s distributed. However, when the account is transferred to charity, Uncle Sam doesn’t get anything. The charity gets it all! So, converting the IRA to a Roth and naming a charity as beneficiary would be a mistake by creating an unnecessary taxable event, a payable tax to the government, and would reduce the amount received by the charity.

These are just a few of the questions that can arise when talking about an IRA conversion. The more complex your circumstances, the more you’ll benefit from working with an experienced estate planning attorney.

For more information about estate planning, please visit my estate planning website.

Reference: MarketWatch (November 17, 2014) "When a Roth conversion is right for your estate — and when it isn’t"

  • Fill in the form below to download your e-book

    Download your free Avoid These Five Common Estate Planning Myths e-book
  • This field is for validation purposes and should be left unchanged.