VIDEO: What You Need to Know About Roth IRA Conversions

VIDEO: What You Need to Know About Roth IRA Conversions

By Joe Dowdall, CFP®, RICP®, CRPC®, CCFC 

You’re looking forward to a worry-free retirement now more than ever—but is your savings ready to foot the bill? When it comes to retirement savings, both a traditional IRA and a Roth IRA come with a tax benefit, and it’s vital to understand the differences between the two before deciding if a conversion is right for you. In this video, we explain the differences between a traditional and Roth IRA and what a conversion is to help determine if you could benefit.

Transcript

Introduction to IRA Basics and the Value of Roth IRA Conversions

Hello, my name is Joe Dowdall, and I am a retirement planner at Worth Asset Management. We specialize in crafting individualized, holistic financial plans tailored to the unique goals and objectives of each client. Today, I want to share insights into one of my favorite topics: Roth IRA conversions. But first, let’s cover some foundational aspects of traditional IRAs and Roth IRAs to set the stage.

Understanding Traditional and Roth IRAs

The primary difference between traditional and Roth IRAs revolves around taxation. Contributions to traditional IRAs are made on a tax-deferred basis. This means you don’t pay taxes on the money you contribute until you withdraw it during retirement. On the other hand, Roth IRA contributions are made with after-tax dollars. The benefit here is that withdrawals, including gains, are tax-free in retirement, provided certain conditions are met.

Strategic Tax Planning: Roth IRA Conversions

One of the key strategies we discuss with clients involves converting funds from a traditional IRA to a Roth IRA. This decision should be influenced by a comparison of your current tax rate with your anticipated tax rate in retirement. If you anticipate being in a higher tax bracket in the future, converting to a Roth IRA could be advantageous, despite the upfront tax implications of the conversion. This strategic move can position your savings in a tax-free environment for future withdrawals.

Navigating IRA Conversion Limits

It’s important to note that while there are limits on how much you can contribute to IRAs annually, there are no income or conversion limits on how much you can convert from a traditional to a Roth IRA. This provides a significant opportunity for strategic tax planning, but it also requires careful consideration to avoid converting too much in a single year, which could lead to unexpectedly high taxes.

Leveraging Backdoor Roth Contributions for High Earners

For high earners who exceed the income limits for Roth IRA contributions, a backdoor Roth IRA contribution is a viable strategy. This involves making a contribution to a traditional IRA, which has no income limits, and then converting those funds to a Roth IRA soon after. This strategy allows you to sidestep income restrictions and enjoy the benefits of a Roth IRA.

Invitation to Discuss Roth IRA Strategies

If Roth IRA conversions or backdoor Roths pique your interest, I’m more than happy to discuss these strategies in more detail. Whether you’re looking for a brief chat or a deep dive into how these strategies might benefit your financial plan, feel free to reach out. You can find my contact information below to schedule a 15-minute call to get started.

Thank you for your time, and take care!