Wouldn’t it be nice to pay less income tax in retirement? One way is with a tax-advantaged retirement account called a Roth IRA or ROTH 401K.

A Roth IRA:
  • Provides the flexibility to withdraw funds only if the money is needed.
  • Is not subject to Required Minimum Distributions (RMDs).
  • Your beneficiaries will receive tax-free distributions in the future which can help lessen the impact of taxes in an estate planning.
  • Tax-free withdrawals after age 59.5
Do you have a ROTH option inside your Employer Sponsored Retirement Plan?

With the passage of the Secure Act 2.0, SIMPLE IRAS, and SEPS have joined the line up of retirement accounts that can accept ROTH contributions.  The best part is there is not an income limitation to contribute to an employer sponsored ROTH retirement account!  Check with your employer to discuss your options.

Can you open an Individual ROTH IRA?

Contributions to a ROTH (outside of an employer plan) are subject to income limitations.  If you fall below the limitation, consider opening an individual ROTH IRA as part of your retirement savings plan.

Should I Consider a ROTH Conversion Strategy? AKA Back Door ROTH

A backdoor ROTH is not a type of account nor is it a way to dodge taxes.  This is 100% above board.  If you want to convert tax deferred retirement dollars to tax free retirement dollars, there are tax consequences in the year of the conversion.  Before initiating a Roth IRA conversation strategy, ask yourself these six questions prior to making your decision:

#1- Is now a good time?

CNBC recently published an article stating, “The recent stock market meltdown may have dented Americans’ retirement savings, but there’s a silver lining: The downturn made one common retirement strategy less costly for investors- The Backdoor Roth!

The strategy, known as a Roth IRA conversion, involves changing a traditional, pre-tax retirement account — such as a 401(k) plan or a qualified individual retirement account — to an after-tax Roth fund….savers would opt to pay income tax now, while markets are down and tax rates are lower under the Tax Cuts and Jobs Act.

Of course, savers shouldn’t peg a Roth-conversion decision solely to stock-market gyrations — doing so would be like trying to time the market, which is a fool’s errand.”

#2- Can you pay the taxes?

Since traditional IRAs and other qualified retirement plans are tax-deferred, upon converting assets into a Roth IRA, the account owner must pay income tax on the amount they convert. Also, taxes are due upfront when the conversion occurs.

#3- Are you comfortable increasing your Adjusted Gross Income (AGI)?

A Roth IRA conversion will raise your income in the year that the conversion occurs, increasing your AGI, which can impact your taxes by moving you into a higher income tax bracket. In addition, if you are retired, be mindful that Medicare Part B uses your two previous years’ income to calculate your monthly premium. Therefore, the conversion may increase your Part B payment for at least two years.

#4- Will you lose eligibility for specific tax write-offs?

For example, the child tax credit and student loan interest deduction are determined by personal income. Initiating a Roth IRA conversion may mean you lose these deductions if your AGI increases.

#5- Will you need the money within five years?

Roth IRAs typically offer penalty and tax-free withdrawals anytime on contributions. Still, investors must wait five years to access the funds without a 10% penalty when using conversion monies, regardless of age. So it’s something to think about whether you’ll need money from your Roth IRA before the five-year rule sunsets. If that’s a possibility, there may be a more appropriate strategy for you.

#6- Does your qualified retirement plan allow Roth IRA conversions?

If your funds are inside your employer’s retirement savings plan, check the plan’s documents to see if a Roth IRA conversion is allowed. Then, consult your employee handbook, HR department, or the employer-sponsored retirement plan’s custodian for answers about your situation.

If you are considering a Roth IRA or Roth conversion strategy it important to understand not only how it will impact to your retirement income,  but the current tax impacts as well.  Before making any changes it is always recommended that you consult your financial professional and tax expert.


 *This content is developed from sources believed to be providing accurate information.  The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual tax situation.