To Roth, or Not to Roth: That is the Question - A Practical Guide to Roth Conversions
Our role as Wealth Management Advisors is to help our clients on a holistic level. While a significant portion of this is the investment management, an additional component is the tax planning involved year in and year out. It is always our goal to help our clients manage their wealth in the most tax efficient ways possible. Among the many tax and surprisingly, estate planning strategies, one of the more powerful can be a Roth Conversion. There are many benefits to converting Traditional IRAs to Roth IRAs. There are also types of clients it makes sense for and some it doesn’t make sense for. First, let’s take a look at what a Roth Conversion is and how it works.
What is a Roth Conversion?
A Roth conversion is when money is converted from a Traditional IRA (distributions taxed as ordinary income) into a Roth IRA (distributions never taxed as long as the 5 year rule has been met). Since money in a Traditional IRA must be taxed as ordinary income upon distribution, when money is converted to a Roth IRA, it can provide long term tax savings since the Roth IRA will never be taxed (once the 5 year rule has been met). This can be an incredibly valuable tax and estate planning tool for certain clients.
What are the differences between a Traditional IRA and Roth IRA as it relates to a conversion?
There are a few important characteristics of both a Traditional IRA and Roth IRA that can help clients navigate the difference between the two as well as determine whether or not it makes sense to convert.