Roth Conversions, a Win-Win

LouAnn Schulfer, AWMA®, AIF® Accredited Wealth Management Advisor® Accredited Investment Fiduciary |

ROTH IRAs can be an incredible tax opportunity for many.  If your income falls below certain thresholds updated each year by the IRS, you are allowed to contribute a limited amount of your earned income which if you follow the rules, can grow tax-free, be withdrawn tax-free and is not subject to Required Minimum Distributions in later years.  The fact that the government limits the dollar amount of annual contributions is in and of itself an eye opener as to the potential power of years of tax-free growth and withdrawals, or said another way, years of relinquished tax revenue that would have otherwise been received by the federal and state taxation authorities.

A Roth IRA conversion is different than a Roth IRA contribution.  A conversion is taking money that already exists in a pre-tax Traditional IRA and converting those dollars to a Roth IRA.  Federal and state ordinary income taxes are due in full on the entire amount of the conversion, in the year that you convert.  In 2010, there was a significant law change lifting the limit on both the amount of dollars that could be converted to a Roth IRA as well as who could convert.  Now, anyone regardless of income can convert any amount they wish.  What was the incentive to change and keep this law on the books?  For the government, it generates up-front tax revenue which would have otherwise been deferred for years by an IRA owner.  Additionally, the amount of the conversion is ADDED to ordinary income on your 1040  and can push the taxpayer’s tax brackets higher, potentially paying a higher percentage of income tax than they otherwise would have in that year or on future withdrawals from the IRA.

We watch for opportunities in our clients’ income tax years when their taxable income may have taken a dip.  Ebbs and flows in business income, an early retirement or a switch to a part-time career could be opportunities to take advantage of a Roth IRA conversion.  You’ll pay taxes now, which is a win for the state and federal government’s current fiscal year, and you’ll avoid taxes later which is a win for your future tax years.  Roth conversions can be a win-win!


LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or  Visit | blog.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.  
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. 
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.