What does Your Retirement Plan Advisor Say: Converting to a Roth IRA

By Jeremy Sorci | August 05, 2016

As a retirement plan fiduciary, one of the more common questions I'm asked by clients is when -- and if  -- they should convert to a Roth IRA. Roth IRAs offer a number of benefits to certain investors, such as those who receive large enough pension or Social Security distributions to push them into a higher tax bracket.

Jeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyIf you're not sure whether a Roth is the right choice for you, read on to learn more about how the Roth individual retirement account works -- and who it may benefit.

Ask a Retirement Plan Advisor: How Does a Roth IRA Work?

Unlike a traditional IRA, you pay your taxes up-front with a Roth IRA. Instead of taking deductions on your contributions at the time you make them then pay taxes when you take distributions later, as you do with a traditional IRA, a Roth allows you to make tax-free withdrawals in retirement. 

This is helpful for those who expect to be in a higher tax bracket when they're retired than the bracket they're in now, or for those who anticipate that taxes will increase over the years. Essentially, the Roth's appeal boils down to the tax benefits you'll receive later in life. 

For that reason, many investment professionals have traditionally recommended Roths to younger investors, rather than those closer to retirement, and those who have several decades left to let their savings grow tax-free. But as many wealth advisors know, Roths offer a host of benefits to those in their 50s and 60s, or anyone who'll be guaranteed considerable annual income in retirement. 

Roths, Taxes, and Your Comprehensive Financial Plan

If your retirement income will come from a traditional IRA, a 401k or a pension, you're most likely going to have to pay income taxes on the distributions you receive. And while many people assume they'll be in a lower tax bracket while in retirement because their expenses will decrease; in reality, this may not be an accurate assumption. 

Just because you're spending less doesn't automatically mean you'll drop into a lower tax bracket. In fact, when you stop working, you'll actually lose certain deductions, such as 401k deductions and -- if you've focused on paying off your home before retirement -- mortgage interest reductions. 

Avoid unpleasant surprises by adding up your Social Security benefits and your pension and asking your CPA to provide you with a projection of your tax obligations in retirement, taking lower spending and fewer deductions into account. 

Ask Your Wealth Advisor for Help With a Roth Conversion

JJeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyIf you choose to convert an existing IRA into a Roth, you may get hit with a tax bill, as money you convert will count as income for the year. Craft a plan with your CPA and wealth advisor to minimize the burden by putting your gains to use. 

If right now, the stock market is on the upswing, you may want to use some of your winning positions to offset the cost of a Roth conversion. Work with your wealth advisor to determine whether a portfolio rebalance makes sense.

Remember, if you take money from your portfolio to cover the conversion costs, you'll see a decrease in your portfolio's value. Offset this by structure your Roth reinvestment to appreciate more over a longer time horizon. 

Consider these long-term investments for withdrawal at the end of your retirement, as you should withdraw from the least tax-efficient accounts first.

Benefits of Roth Transferrals: Estate Planning Strategies

Jeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyIf you're in the lucky position of not having to take withdrawals from your Roth during retirement, consider that this type of tax-deferred account can be transferred to your dependents without causing them to accrue capital gains.

Of course, your beneficiary will still have to take distributions when they hit age 72, but until then, the account can experience compounding growth over time. 

Your wealth advisor will help you explore the potential benefits of converting to a Roth and keep your retirement planning on track.