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Roth Conversions - Turning Heads at the BBQ

Rizek Housari, CPA, CFP®

AUTHORS NOTE

Creating a custom financial model of your future gives you the framework and lens to make important financial decisions.

How to best plan your estate is just one of the important decisions to consider.

At Divergent Wealth, we are state-of-the-art financial planners and investment professionals who specialize in simplifying complicated things.

To create a complimentary customized financial plan, call us at 385-CFP-4000. For information, visit us at www.divergentwealth.com.

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"Roth Conversions."

Saying that at the BBQ will turn some heads.

Roth conversions may not apply to you right now, but I just want to make you aware of the strategy. If nothing else, you will rest easy knowing you are one of the cool kids on the block.

There are 2 main types of retirement accounts: Traditional (pre-tax) and Roth (after-tax).

What is a Roth conversion you ask?

A Roth conversion occurs when retirement funds are transferred from pre-tax accounts to Roth accounts. These transferred funds are recognized as income in the year of conversion and are taxed at ordinary income rates.

We typically don’t convert the whole retirement account at once, just chunks.

Why? Well because you must pay taxes on the amount that you convert, and we want to be strategic on filling up your tax brackets.

The IRS wants their slice of the pie, and when you made that initial contribution, you got to take a tax deduction. When you convert to Roth, the time has come to pay Uncle Sam.

There are many reasons to consider Roth conversions as part of your financial plan. Here are just a few:

  • Do you want to pay less taxes as you get older?
  • Do you want to decide when you pay taxes and how much?
  • Do you want to control when to take money out of your retirement account?
  • How does a tax-free inheritance to your children sound?
  • Do you like knowing that your earnings grow tax free?

So why am I telling you about Roth conversions right now? Well, the stock market is down. That means it’s time to consider doing conversions. The tax liability on conversions is likely lower today than it was earlier this year.

Quick illustration.

Let’s say you only want to convert 100 shares of TROUT stock that is currently in your Traditional IRA.

January - Traditional IRA is worth $100,000

June – Traditional IRA is worth $80,000

If you converted in January, you would have recognized ordinary income of $100,000. If you converted in June, you would have recognized ordinary income of only $80,000.

Assuming a marginal tax rate of 22%, (Wow! That sounded really nerdy.) that is a savings of $4,400. Now we are talking!

Point is, if you are planning on doing a Roth conversion, now might be a good time.

When you are soaking up that sun this summer, just remember, you are now one of the cool kids.

Rizek Housari, CPA, CFP®



Creating a custom financial model of your future gives you the framework and lens to make important financial and estate planning decisions. At DivergentWealth® we are state-of-the-art financial planners and investment professionals who specialize in simplifying complicated things. To create a customized complimentary financial plan, call us at 385-CFP-4000. For information, visit us at www.divergentwealth.com.

The SCT Library’s mission is to cut through the clutter and the spin to deliver financial straight talk -- to simplify complicated things. These short guides will reduce complex topics to their core issues to assist in making the best financial decisions for your family.

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