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Tax Advantages of a Roth IRA Conversion

March 21, 2024

If you’re wondering when is the best time to convert a traditional IRA to a Roth IRA, the following information may help. Roth IRA conversions typically make the most sense for older retirement plan investors, who tend to be in higher tax brackets. 

The benefits of converting a traditional IRA to a Roth IRA include:

  • Tax-free investment growth (if distributions satisfy the “five-year holding period” criterion and certain other requirements)
  • No required minimum distributions during the owner’s lifetime

One of the most important considerations when converting to a Roth IRA is the tax consequences:

  • When IRA assets are converted, they’re taxed as ordinary income.
  • When asset values are high, due to market appreciation, your tax liability may be greater. The reverse is also true; diminished asset values generate less tax liability, allowing investors to convert larger sums in a more tax-efficient manner.
  • It’s important to note that the conversion qualifies as a “taxable event” in the year it occurs.

Under previous tax law, if you changed your mind after converting a traditional IRA into a Roth IRA, you could reverse your decision up until the due date of your tax return. However, the Tax Cuts and Jobs Act of 2017 removed the ability to recharacterize any Roth IRA conversions done in 2018 and going forward. 

Since Roth conversions can be complex, it’s important to receive the guidance of an experienced financial professional. Contact the office to schedule a time to discuss whether a Roth IRA conversion is an appropriate strategy for you.

This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

Converting from a traditional IRA to a Roth IRA is a taxable event.

A Roth IRA offers tax free withdrawals on taxable contributions.

To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.