Some Pros & Cons of Roth IRAs – July 27, 2022
Roth IRA Conversions
What are your choices? What are the benefits?
If you own an Individual Retirement Account (IRA), perhaps you have heard about Roth IRA conversions. Converting your traditional IRA to a Roth IRA might be a sound financial move depending on your situation.
But remember, this article is for informational purposes only, not a replacement for real-life advice. A professional should be consulted before attempting this type of strategy. Tax rules are constantly changing, and there is no guarantee that the tax treatment of Roth or Traditional IRAs will remain the same as it is now.
Also, Roth conversions have come under much scrutiny during the past few years. Congress has considered legislation that would prevent high-income Americans from Roth conversions. While no action has taken place, it is possible that Roth rules may change in the future.
Why go Roth? Every Roth IRA conversion is based on a belief: the belief that income tax rates will be higher in the future than they are now. If you hold this belief, then you may want to consider a Roth conversion.
Once you are 59½ and have had your Roth IRA open for at least five calendar years, withdrawals of the earnings from your Roth IRA are exempt from federal income taxes. In addition, once five calendar years have passed, you can withdraw your Roth IRA contributions tax-free and penalty-free.1
Under current I.R.S. rules, if you are the original owner of a Roth IRA, you never have to make mandatory withdrawals from your account. And you can make contributions to a Roth IRA as long as you continue to have earned imcome.2
Currently, if your federal tax filing status is married filing jointly and your adjusted gross income (AGI) is $204,000 or less, you can contribute a maximum of $6,000 to your Roth IRA, $7,000 if you’re age 50 or older. The maximum contribution is also available to single filers with an AGI of $129,000 or less. Depending on how high your AGI is, the amount you are able to contribute may change.3
Why not go Roth? There are many reasons, but here are two to consider: you have to be prepared for the taxable event and time may not be on your side.
A Roth IRA conversion cannot be undone. The I.R.S. regards it as a payout from a traditional IRA prior to that money entering a Roth IRA, and the payout represents taxable income. That taxable income stemming from the conversion could have tax consequences in the year when the conversion occurs.4
In many respects, the earlier in life you convert a regular IRA to a Roth, the better. Your income may rise as you get older; you could finish your career in a higher tax bracket than you were in when you were first employed. Those conditions relate to a key argument for going Roth: it is better to pay taxes on IRA contributions today than on IRA withdrawals tomorrow.
On the other hand, since many retirees have lower income levels than their end salaries, they may retire at a lower tax rate. That is a key argument against Roth conversion.
You could choose to “have it both ways.” As no one can reliably predict the future of American taxation, some people contribute to both Roth and traditional IRAs – figuring that they can be at least “half right” regardless of whether taxes increase or decrease.
If you do go Roth, your heirs may receive tax-free distributions. Lastly, Roth IRAs can prove to be very useful estate management tools. If I.R.S. rules are followed, Roth IRA heirs may end up with a tax-free inheritance from the account. In contrast, distributions of inherited assets from a traditional IRA are taxed.1
Under the 2019 SECURE Act, most non-spouse beneficiaries of a Roth IRA are required to have the funds distributed to them by the end of the tenth calendar year following the year of the original owner’s death.5
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Registered representatives offer securities through AE Financial Services, LLC (AEFS), member FINRA/SIPC. Investment advisory services offered through OLV Investment Group, a Registered Investment Adviser. Insurance offered through OLV Investment Group. OLV Investment Group is independent of AEFS.
1. U.S. News, January 27, 2022
2. Internal Revenue Service, November 27, 2021
3. Internal Revenue Service, November 5, 2021
4. Investopedia, February 2, 2022
5. Forbes, December 14, 2021
OLV Offices Safely Reopening – June 1, 2020
As of June 1, 2020, OLV Investment Group has begun the process of safely reopening both office locations! We are so thankful for our clients and their willingness to meet via zoom video and phone conferencing as we have navigated Governor Whitmer’s “stay at home” orders. We fully understand that COVID-19 presents real risks to a portion of our population, which includes some of our clients. As we are in the process of slowly reopening, we will continue and encourage our full-service distance meetings via video or phone conferencing. However, should you request an in-person meeting we are happy to see you face to face. Our main concern is for YOU – our clients, and we are happy to meet however you are most comfortable! We have taken many precautions including a deep cleaning of our office, an ample supply of hand sanitizer, and available masks for all who enter our facilities. Advisors and office staff will gladly wear masks upon client request.
When our office staff calls to set up your next review, please let them know what review process you would like to utilize. You are welcome to change the type of review you choose at any time in the future. We remain steadfast in our prudent and safe approach to managing our client relationships. We thank you for your patience and trust as we continue to move forward in these unprecedented times.
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