We have received a lot of inquiries about our retirement accounts. One area of particular interest is the transformation of Ross.
Luckily, IRA expert Ed Slot and his staff spend a lot of time and effort dealing with the most important questions you should ask before deciding that conversion makes sense to you. The following questions are very important: If you haven’t considered all of them, you probably shouldn’t complete the conversion.
Question 1: When do you need funds to consider converting? If you haven’t seen a period of 10 to 15 years, you probably shouldn’t consider converting.
Question 2: Do you think the future tax rate, where you are likely to withdraw funds from your account, will be higher than the current tax rate? If future tax rates appear to be much higher than current tax rates, there is an increasing incentive to make a change.
Question 3: If I convert now, where will the money come from? Is there any funds available to convert? Before converting, it is essential to determine what your income tax liability will be. Naturally, you need to know what your marginal tax bracket will be, based on all the other income you report in the year of conversion. If your funds are available from non-IRA funds, it is the most cost-effective.
The amount of conversions will be added to other income that must be reported in the conversion year. The total amount of income you report may affect other income tax liabilities. For example, if adjusted gross income exceeds the specified IRS limit, it may be subject to additional fees associated with Part B Medicare Premium. This calculation is performed by the IRS two years after the year of conversion. So, if you plan to convert in 2025, Medicare will review the AGI in 2027 to determine if the extra fees are related to Medicare’s Part B coverage.
The Tax Reductions and Employment Act, which came into effect in 2018, provides that Roth conversions are permanent and cannot be relocated.
Who can convert?
Traditional IRA owners can do loss conversions. The group includes individuals with SEP IRAs and simple IRAs (after the first two years). If the plan allows in-service distributions to allow funds to be converted, then plans of 401(k), 403(b), and government 457 can do the loss conversion. Some plans allow conversions only after an employee stops working.
Funds must leave the plan by December 31st of that year.
A spouse who inherits an IRA can roll the account to his or her IRA before converting it to a Roth IRA. A spouse inheriting a 401(k) can do the same thing.
An early distribution penalty of 10% is not evaluated during loss conversion. However, if the owner is under 59 1/2 years of age at the time of distribution, within five years of conversion, you can assess whether any of the converted amounts will be distributed to the owner of Ross.
Software may help you make the decision
Determine if it needs to be converted and/or if partial conversions should be considered. If you want to help you make this decision, Ed Slott recommends a retirement plan analyzer available through Brentmark software (cost $595). Slott believes the software is easy to use for IRA planning calculations. For more information, please visit brentmark.com.
Conclusion: Roth conversions are permanent, so conversions should be carefully planned. You need to decide not only if you need to convert, but also if you need to do a partial conversion rather than converting all your accounts in a year. In many situations, conversion to losses is undoubtedly cost-effective, but conversions should not be done without careful consideration of all tax consequences.
Elliot Raphaelson welcomes your questions and comments at rapelliot@gmail.com.
