Retirement Accounts

The Savings Game: Roth Advantages Reviewed

BY Tribune News Service TIMEAugust 17, 2022 PRINT

Based on reader inquiries, many readers do not understand when funds are available after a Roth conversion. When you make a Roth IRA contribution, it is understood, by most, that after you pay the income tax in the year of the contribution, there is no tax or penalty associated with the withdrawal of your contributions. With a Roth conversion, the situation is different.

There is no tax or early withdrawal penalty associated with the withdrawal of the converted amount after five years or distributed after 59 1/2. However, if you established a Roth account earlier, the five-year time frame for conversion starts when you made your first Roth conversion. So, if you made a Roth contribution five years ago, you don’t have to wait five years to avoid an early withdrawal penalty for withdrawal of contributions. Regarding earnings on any Roth conversion, there is no tax or penalty after five years and 59 1/2.

Ed Slott (www.IRAhelp.com), in a recent newsletter, reminded readers why Roth conversions make more sense as a result of the SECURE Act. He indicated that recharacterization is no longer available. So, if you do initiate a conversion, you can’t change your mind. A Roth conversion may result in higher premiums later for Medicare Part B and Part D, because your income will increase the year of the conversion. So, you may want to consider partial Roth conversions each year rather than all at once.

Timing is important. For many workers, individuals between 40 and 60 have peak earnings. If possible, you want to convert to a Roth when your income is lower, so if you have a lower tax rate in any year due to tax losses, high deductions or high credits, that is an optimum time to convert.

Conversions make sense if you are concerned about future income tax rate increases, which is likely. Roth accounts are not subject to required minimum distributions (RMDs), which means no taxes. In addition, your beneficiaries will not have to pay any taxes on withdrawals. This is more important because the SECURE Act requires most beneficiaries to empty their account in 10 years, and make RMDs each year if they inherit traditional IRAS, and you have been making RMDs.

Accordingly, if your beneficiary inherits a traditional IRA, they will have to pay taxes more quickly. If you, as an owner, have reached your Required Beginning Date (RBD) and have been making RMDs, most of your beneficiaries will have to initiate RMDs for nine years, and empty their account in the 10th year after your death. All Roth IRA owners are considered to have died before their required beginning date (RBD), regardless of age. So, Roth beneficiaries will not have RMDs if you establish a Roth account.

RMDs cannot be converted to a Roth. So, your beneficiaries will have less flexibility if they are required to make RMDs each year.

Roth conversions are also more favorable for estate planning, especially if you establish a trust as a beneficiary. If you include a Roth account in your trust, the trust will pay no taxes. Otherwise, with traditional IRAs, the trust will have to pay high income taxes associated with trust regulations.

The bottom line is that Roth conversions make sense for yourself as an IRA owner and your beneficiaries. Generally, it is prudent to convert gradually, especially in years when your marginal tax bracket is lower.

(Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.)

©2022 Elliot Raphaelson. Distributed by Tribune Content Agency, LLC.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

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