​The IRA is one of the most popular retirement savings vehicles. There are several variations, but in recent years, the Roth IRA has become an increasingly popular option. Roth IRA balances grew 51 percent from 2010 to 2013, while traditional IRA balances grew 28 percent over that same period. In 2013 more than $6 billion was contributed to Roth accounts, while only $4.61 billion was contributed to traditional IRAs.1

The Roth’s unique tax treatment is a big factor in its popularity. With a Roth you make after-tax contributions, which means you can’t take a deduction for the money you put into the account. However, your funds grow tax-deferred inside the Roth, and your withdrawals of earnings and interest are tax-free as long as you wait until age 59 ½. That means you can use a Roth to create a tax-free income stream in retirement.

Unfortunately, many people are unable to contribute to a Roth. Your income may exceed the Roth’s limitations. It’s possible that you’ve accumulated much of your retirement assets in a 401(k) or traditional IRA and don’t want to start a Roth from scratch.

Fortunately, you can use a strategy known as a Roth conversion and still take advantage of the Roth’s unique tax structure. This strategy isn’t right for everyone, but it can be effective in the right situation. A financial professional can help you determine whether it’s right for you.

Roth Conversion Basics
As the name suggests, a Roth conversion is the process of converting your traditional IRA funds into a Roth account. This is usually initiated through paperwork from your IRA custodian or your financial professional. The IRA custodian liquidates the assets in the traditional IRA and transfers the funds to the newly created Roth. Once the funds are in the Roth, you can allocate them as you like.

Conversion and Taxes
All distributions from a traditional IRA are taxable. That’s true even if you’re converting the funds to a Roth. You have to pay income taxes on the converted amount before the funds can move into the new Roth IRA.

You have the option of having the taxes withheld from the converted amount, but that may not be the wisest course of action. After all, the whole point of the conversion is to maximize your tax-free income in retirement. The best way to do that is to fund the Roth as much as possible. It may be helpful if you use other non-IRA funds to pay that tax bill. That way, the full conversion amount can go into the Roth and start accumulating on a tax-favored basis.

Roth Conversion Benefits
The primary benefit of a Roth conversion is that it creates tax-free income in retirement. That income could help you better achieve your goals and live a more comfortable and financially stable lifestyle.

However, tax-free income isn’t the only benefit. Your Roth assets are also tax-free for your beneficiaries upon your death. Additionally, you won’t have to take required minimum distributions from your Roth at age 70½, as you would have to do with a traditional IRA. That means you can let your Roth assets accumulate as long as you want.

Ready to explore whether a Roth conversion is right for you? Let’s talk about it. Contact us today at MasterPlan Retirement Consultants. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.


Investment advisory services offered through MasterPlan Retirement Consultants, Inc. a Registered Investment Advisor in the state of Georgia. Insurance products & services offered through Fricks and Associates, Inc. MasterPlan Retirement Consultants, Inc. & Fricks and Associates, Inc are affiliated companies.
MasterPlan Retirement Consultants, Inc. & Fricks and Associates, Inc are not affiliated with or endorsed by the Social Security Administration or any government agency.
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