IMPORTANT DISCLOSURE INFORMATION
The following presentation by New England Capital Financial Advisors, LLC (“NECFA”) is intended for general information purposes only. No portion of the presentation serves as the receipt of, or as a substitute for, personalized investment advice from NECFA or any other investment professional of your choosing. Please see additional important disclosure at the end of this penetration. A copy of NECFA’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.newenglandcapital.com.
Roth Conversions
Hi everyone, I’m Liam Wallace, a Certified Financial Planner® at New England Capital, and today we are going to talk about Roth conversions and if they could be right for you.
So, what is a Roth conversion? A Roth conversion is a process where funds from a pre-tax retirement account, like a Traditional IRA, 401(k), or similar account are transferred into a Roth IRA. When you convert, you will owe income taxes on the amount converted in the year of the conversion, but then you will never owe any taxes on any growth or withdrawals again.
Now we are going to go over some of the factors that come into play when deciding if a Roth conversion makes sense.
Will you be in a lower tax bracket now, or during retirement? If you think that you are in a lower tax bracket now than you will be during retirement, it could make sense to do a Roth conversion now. This is because you would pay a lower amount of tax on the conversion today than you would if you were in a higher tax bracket during retirement.
Where will you get the money to pay for the taxes due from the conversion? Before deciding to pay for the taxes out of your IRA, there are a couple of things to consider. If you’re below 59.5 and you withhold taxes for a conversion from your IRA, that withholding could also be subject to a 10% penalty. Also, if you withhold the taxes from your IRA you could miss out on the compound growth of that money in your account. If you have enough cash reserves in the bank, it could make sense to pay for the taxes due from the conversion that way, in order to maximize the growth of your investments in a tax free retirement account.
What is your plan for these funds? Will you leave them to charity, or will you leave them to your children? If you plan to leave funds in a Traditional IRA to a charity, it could make sense to keep the funds in your pre-tax retirement account. This is because there is a great likelihood that the charity will not have to pay taxes on the funds that are donated to them. Also, once you are age 70.5, you can begin doing Qualified Charitable Distributions (or QCDs). This is where you donate to charity from your IRA (up to $108,000 in 2025) and you won’t owe any income tax on the distribution. A charitable distribution can also count towards your Required Minimum Distribution (or RMD).
If you plan to leave funds in a Traditional IRA to your children, it may make sense to begin converting funds from pre-tax retirement accounts to a Roth IRA. The SECURE Act 2.0 got rid of the “stretch IRA”, where beneficiaries of a pre-tax IRA could take out a small Required Minimum Distribution each year based on their life expectancy. Now, most beneficiaries (other than spouses) are required to liquidate an Inherited IRA over a 10 year period. If there is a large balance in the IRA, this could create a large tax burden for the beneficiary, especially if they are in the high earning years of their life. Beneficiaries of a Roth IRA, are still required to liquidate the account within 10 years, but there are no taxes due on any withdrawals.
Unlike pre-tax retirement accounts, there are no Required Minimum Distributions for Roth IRAs. Converting some pre-tax funds to Roth prior to RMD age could be beneficial, especially if your RMD would be so large that it would cause your Medicare Part B premium to increase. For retirees in Connecticut, it could make sense to convert prior to retiring because by 2026 the state will no longer tax IRA withdrawals for single filers with AGI under $75,000 or married filing jointly filers with AGI under $100,000. Since withdrawals from Roth IRAs don’t count towards AGI, it may make sense to convert some funds now so that AGI is below the threshold of taxability in CT.
When markets are down, like they are so far this year, it could be a good time to convert pre-tax funds to a Roth IRA. You will owe less taxes than you would have if the market were up, and once converted all of the growth when markets come back will be tax free.
There are plenty of factors to think about when deciding if a Roth conversion is right for you, and having an advisor that knows the nuances can be very beneficial. Please reach out to your advisor with any questions you may have.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by New England Capital Financial Advisors, LLC [“NECFA”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from NECFA. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. NECFA is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the NECFA’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.newenglandcapital.com. Please Note: NECFA does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to NECFA’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a NECFA client, please contact NECFA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.