roth conversion

Decide if a Roth Conversion is the Right Option for You

As you plan for retirement, you might consider a Roth conversion in order to gain access to tax-free withdrawals. A Roth conversion involves transferring money from your 401(k) or Traditional IRA into a Roth IRA. 

Roth IRAs and Traditional IRAs are some of the most popular methods for retirement planning. You make regular contributions into an account over a period of time, often decades, and you withdraw when you are ready to retire. As you add to your savings over time, it accrues a interest and can result in a substantial amount of earnings over time. Currently, you can withdraw from your IRA account at age 59 ½ without any penalties or restrictions. 

Let’s review the basic facts of this strategy to help you decide if it’s the right decision for you.  

Is a Roth IRA the Right Option for Me?

There are several distinctions between a Roth IRA and a Traditional IRA. The primary difference involves the way that you pay taxes on your contributions. Traditional IRAs are taxed at the point of withdrawal, while Roth IRAs are taxed at the point of contribution. 

When you withdraw from your Roth IRA, you don’t owe taxes to the IRS because you already paid the taxes upfront, each time you moved money into it. 

The taxman will always get a cut, so it’s a question of how and when you choose to be taxed. With a Roth IRA, you pay on the front end. Then, you reap the benefits down the road: tax-free growth on the funds you contribute, and tax-free withdrawals in retirement. 

Both IRA options are popular—around 29 percent of taxpayers hold a Traditional IRA, while around 21 percent have a Roth. 

Roth IRAs are particularly beneficial for young adults who want to start planning their retirement. Earlier in your career, your income is likely less than it will be during middle-age. By default, this also means that you’ll be paying less in upfront taxes while you begin making contributions. 

With a Roth,when you’re ready to withdraw, you won’t owe any taxes on the contributions that you made earlier. Therefore, you’ll pay less overall in the long run in exchange for paying taxes up-front. 

A financial advisor or your CPA can help you assess your finances to determine whether it makes more sense for you to pay taxes on your IRA now (Roth) or later at the point of withdrawal (Traditional). 

The Roth Conversion Process for High-Income Earners

Unlike Traditional IRAs, Roths have income limits: 

  • $140,000 for single individuals 
  • $208,000 for married couples filing jointly

The income limits refer to your ability to make contributions; there is no income limit for carrying or converting to a Roth IRA. 

If you’re above the income limit and choose to convert a Traditional IRA to a Roth, you’ll need to pay taxes on any deductible contributions or investment gains that were placed into the account before converting it. 

Once you’ve fulfilled your tax obligations for the conversion, you’re then able to legally roll over your Traditional IRA into a Roth.

Roth Conversion Process for 401(k)s

401(k)s are popular retirement accounts for employees that opt for their companies’ retirement benefits. Most companies offer a percentage-matching contribution that essentially provides you with free money added to your retirement account. 

However, if you decide to leave your job, you might want to roll over your 401(k) into a Roth. Take into consideration that anytime your rollover funds from a 401(k) into a Roth, it is a taxable event and you will be responsible for paying taxes due on the amount you want to rollover. There is no time limit as to when you can accomplish this rollover as long as your separation from the company is on file with the 401(k) company.

While you have your 401(k) through an employer, contributions are pulled automatically from your paychecks, pre-tax. You may consider checking with your HR department to see if your company offers a Roth 401(k) option. This would give you the benefit of tax free growth and distribution in your 401(k) account while handling the taxation upfront.

When you roll over your 401(k) to a Roth IRA, you’ll gain access to:

  • A broader array of investment opportunities
  • Roth IRA tax advantages: tax-free growth and withdrawals 

To start the transition, you would open your Roth IRA account and request a rollover from your current 401(k) provider. Your former employer should have information on your existing account if you need help accessing it. Remember, this conversion process will require you to pay any taxes due for converting to the Roth.

Then, you have the option to pick your investments. You can automate this process, select your investments manually, or work with a financial advisor to find the best opportunities available. 

Get Assistance with Your Roth Conversion in Idaho

If you’re an Idaho resident interested in converting your 401(k) or Traditional IRA into a Roth IRA, contact Journey Financial anytime to speak with one of our advisors. In the meantime, take our free financial audit if you’d like to learn more about your specific financial picture.