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Should You Convert Your Traditional IRA to a Roth IRA?

D Cator 2014
Donna L. Cator, CFP®, CDFA®
Vice President, Wealth Advisor
[email protected]
(585) 394-4260 x50623

There are many reasons to consider having a Roth IRA as part of your retirement picture, and anyone can convert a traditional IRA to a Roth IRA in 2022. There are no income limits or restrictions based on your tax filing status. You generally must include the amount you convert in your gross income for the year of conversion, but the post-tax portion of any conversion won't be taxed when you convert.

The conversion rules can also be used to allow you to contribute to a Roth IRA in 2022 if you wouldn't otherwise be able to make regular annual contributions because of the income limits (sometimes called a "back door" Roth IRA). In 2022, you can't contribute to a Roth IRA if your adjusted gross income (AGI) is $214,000 or more and are married filing jointly or if you're single and earn $144,000 or more. You can contribute up to $6,000 to a traditional IRA in 2022, or $7,000 if you're 50 or older.

The “back door” Roth conversion works best if there are no other pre-tax IRAs. This is because you must aggregate all IRAs, then calculate the ratio of the pre-tax portion relative to the total conversion to determine the taxability of your conversion. If you don’t have any other pre-tax IRAs, you can simply make a nondeductible 2022 contribution to a traditional IRA, and then convert that traditional IRA to a Roth IRA.

Converting is easy.

Simply notify your IRA provider that you want to convert all or part of your existing traditional IRA to a Roth IRA, and they'll provide you with the necessary paperwork to complete. You can also transfer or roll your assets over to a new IRA provider.

Remember that you can also convert SEP IRAs, and SIMPLE IRAs that are at least two years old, to Roth IRAs. And, if you're eligible for a distribution from your employer retirement plan, you may be eligible to transfer or roll those distributions over to a Roth IRA as well.

Caution: If you've inherited a traditional IRA (or SEP/SIMPLE IRA) from someone other than your spouse, you cannot convert that traditional IRA to a Roth IRA.

Why now may be a good time to consider converting a traditional IRA to a Roth IRA.

  1. Current low federal tax rates. The tax rates are scheduled to increase and revert back to pre-2018 rates starting January 1, 2026.
  2. With the markets being down year to date, you can convert more assets which will likely experience market appreciation in the favorable Roth once the markets turn around.
  3. Qualified distributions from Roth IRAs are tax free (and penalty free) if made at least five years after you first establish any Roth IRA, and if one of the following applies:
    • You have reached age 59½ at the time of the withdrawal
    • The withdrawal was made due to qualifying disability
    • The withdrawal was made to pay for first-time homebuyer expenses ($10,000 lifetime limit)
    • The withdrawal is made by your beneficiary or estate after your death. Tip: The five-year holding period begins on January 1 of the tax year for which you make your first contribution to any Roth IRA. Each taxpayer has only one five-year holding period for this purpose.
  4. Roth IRAs are not subject to lifetime required minimum distribution (RMD) rules.
  5. Qualified distributions from Roth IRAs are not included when determining the taxable portion of Social Security benefits. (Under current law)
  6. It’s beneficial to have different buckets of money with different tax consequences to draw on during retirement.
  7. Roth IRA assets transfer to non-spouse beneficiaries in a more tax efficient manner than traditional IRAs.

There are some nuances not described here, but your Wealth Advisor or Tax Professional can provide further clarity on whether or not converting some or all of your IRA to a Roth could benefit your long-term retirement picture.


©2022 Broadridge Investor Communication Solutions, Inc. All rights reserved. This material provided by Donna Cator

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