Is a Roth IRA conversion right for you?

You’ve worked hard to build your retirement savings. Now, as you plan for the years ahead, it’s worth considering how taxes could affect the income you’ll rely on in retirement. A Roth conversion may be one way to create more flexibility and make the most of what you’ve saved.

What is a Roth IRA?

A Roth IRA is a tax-advantaged retirement account that, unlike a Traditional IRA, is funded with after-tax dollars and offers the potential for tax-free income in retirement.

Moving assets from a Traditional IRA or similar eligible tax-deferred account into a Roth IRA can offer several potential advantages. If you’re exploring whether a Roth conversion could fit into your retirement strategy, there are also important considerations to keep in mind.

Advantages of a Roth conversion

• Tax-free income: Your money grows tax-free after the conversion, and qualified withdrawals can provide tax-free income in retirement.

• Lock in today’s tax rates: If you expect to be in a higher tax bracket down the line, or want to protect against potential tax rate increases, paying taxes now allows you to take advantage of today’s known rates.

• No Required Minimum Distributions (RMDs): Roth IRAs are not subject to RMDs during the original owner’s lifetime, giving you more flexibility over when and how you use your retirement savings.

• Leave a tax-free inheritance: Under current IRS rules, beneficiaries can inherit a Roth IRA and generally take distributions tax-free, although certain holding-period and distribution rules may apply.

Important considerations

• Income limits: Eligibility to contribute to a Roth IRA is subject to income limits, though higher-income individuals may still be able to make contributions through two-step Roth conversion strategies — check with your financial professional.

• 5-year withdrawal rule: Conversions may be subject to a five-year holding period before they can be withdrawn without penalty.

• Tax implications: The taxable portion of a Roth conversion is generally included in your income for the year. Spreading conversions over several years can help you manage your taxable income and reduce the risk of moving into a higher tax bracket.

Take the next step

This article provides just a brief overview of the potential advantages and important considerations of a Roth conversion. Talk with your financial professional to chart the best course for your financial future.

Want to learn more? Visit our IRA conversion page to dive deeper and explore potential solutions.