Is Now a Good Time for a Roth Conversion?

Is-Now-a-Good-Time-for-a-Roth-Conversion

The downturn in the stock market may have caused the value of your retirement account to decrease. But if you have a traditional IRA, this decline may provide a valuable opportunity: It may allow you to convert your traditional IRA to a Roth IRA at a lower tax cost. Keep reading to learn more.

Traditional vs. Roth: What Sets Them Apart?

Here’s what makes a traditional IRA different from a Roth IRA:

Traditional IRA. Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax deferred.

On the downside, you generally must pay income tax on withdrawals. In addition, you’ll face a penalty if you withdraw funds before age 59½ — unless you qualify for a handful of exceptions — and you’ll face an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 72.

Roth IRA. Roth IRA contributions are never deductible. But withdrawals — including earnings — are tax free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free. You also don’t have to begin taking RMDs after you reach age 72.

However, the ability to contribute to a Roth IRA is subject to limits based on your MAGI. Fortunately, no matter how high your income, you’re eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount converted.

Minimize Your Tax Hit?

This is where the “benefit” of a stock market downturn comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market goes back up.

It’s important to think through the details before you convert. Here are some of the issues to consider when deciding whether to make a conversion:

Having enough money to pay the tax bill. If you don’t have the cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds. This will erode your nest egg. The more money you convert and the higher your tax bracket, the bigger the tax hit.

Your retirement plans. Your stage of life may also affect your decision. Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expect to retire soon and start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.

Keep in mind that converting a traditional IRA to a Roth isn’t an all-or-nothing deal. You can convert as much or as little of the money from your traditional IRA account as you like. So, you might decide to gradually convert your account to spread out the tax hit over several years.

Ask the Financial Planning Pros

So, is now a good time for a Roth conversion? It could be. There are also other issues that need to be considered before executing a Roth IRA conversion. If this sounds like something you’re interested in, contact the financial planning pros at Ramsay & Associates. We can answer your questions and discuss whether a conversion is right for you.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Do You Have a Tax-Favored Strategy for Retirement?

Do-You-Have-a-Tax-Favored-Strategy-for-Retirement

Do you have a tax-favored strategy for retirement? Does it include a traditional IRA or a Roth IRA? Both have been around for decades, and the rules surrounding them have changed many times. What hasn’t changed is that they can help you save for retirement on a tax-favored basis. Here’s an overview.

Here’s the skinny on traditional IRA contributions

You can make an annual deductible contribution to a traditional IRA if:

  • You (and your spouse) aren’t active participants in employer-sponsored retirement plans, or
  • You (or your spouse) are active participants in an employer plan, and your modified adjusted gross income (MAGI) doesn’t exceed certain levels that vary annually by filing status.

For example, in 2022, if you’re a joint return filer covered by an employer plan, your deductible IRA contribution phases out over $109,000 to $129,000 of MAGI ($68,000 to $78,000 for singles).

Deductible IRA contributions reduce your current tax bill, and earnings are tax deferred. However, withdrawals are taxed in full (and subject to a 10-percent penalty if taken before age 59½, unless one of several exceptions applies). You must begin making minimum withdrawals by April 1 of the year following the year you turn age 72.

You can make an annual, nondeductible IRA contribution without regard to employer plan coverage and your MAGI. The earnings in a nondeductible IRA are tax deferred but taxed when distributed (and subject to a 10-percent penalty if taken early, unless an exception applies).

You must begin making minimum withdrawals by April 1 of the year after the year you reach age 72. Nondeductible contributions aren’t taxed when withdrawn. If you’ve made deductible and nondeductible IRA contributions, a portion of each distribution is treated as coming from nontaxable IRA contributions (and the rest is taxed).

Contribution allowances

The maximum annual IRA contribution (deductible or nondeductible, or a combination) is $6,000 for 2022 and 2021 ($7,000 if age 50 or older). Additionally, your contribution can’t exceed the amount of your compensation included in income for that year. There’s no age limit for making contributions, as long as you have compensation income (before 2021, traditional IRA contributions weren’t allowed after age 70½).

The finer points of your Roth IRA

You can make an annual contribution to a Roth IRA if your income doesn’t exceed certain levels based on filing status. For example, in 2022, if you’re a joint return filer, the maximum annual Roth IRA contribution phases out between $204,000 and $214,000 of MAGI ($129,000 to $144,000 for singles). Annual Roth contributions can be made up to the amount allowed as a contribution to a traditional IRA, reduced by the amount you contribute for the year to non-Roth IRAs, but not reduced by contributions to a SEP or SIMPLE plan.

Roth IRA contributions aren’t deductible. However, earnings are tax-deferred and (unlike a traditional IRA) withdrawals are tax-free if paid out:

  • After a five-year period that begins with the first year for which you made a contribution to a Roth, and
  • Once you reach age 59½, or upon death or disability, or for first-time home-buyer expenses of you, your spouse, child, grandchild, or ancestor (up to $10,000 lifetime).

You can make Roth IRA contributions even after reaching age 72 (if you have compensation income), and you don’t have to take the required minimum distributions from a Roth. You can “rollover” (or convert) a traditional IRA to a Roth regardless of your income. The amount taken out of the traditional IRA and rolled into the Roth is treated for tax purposes as a regular withdrawal (but not subject to the 10-percent early withdrawal penalty).

Be sure you know the specifics if your tax-favored strategy for retirement involves a traditional or Roth IRA. The knowledgeable professionals at Ramsay & Associates can help you understand the ins and outs. Contact us for more information about how you may be able to benefit from and save money for retirement with these types of accounts.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

You still have time to make 2017 IRA contributions | Tax-Advantaged Savings

tax-advantage savingsTax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. The deadline for 2017 contributions is April 17, 2018. Deductible contributions will lower your 2017 tax bill, but even nondeductible contributions can be beneficial.

Don’t lose the opportunity

The 2017 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2017). But any unused limit can’t be carried forward to make larger contributions in future years.

This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So to maximize your potential for tax-deferred or tax-free savings, it’s a good idea to use up as much of your annual limit as possible.

3 types of contributions

If you haven’t already maxed out your 2017 IRA contribution limit, consider making one of these types of contributions by April 17:

1. Deductible traditional. With traditional IRAs, account growth is tax-deferred and distributions are subject to income tax. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k), the contribution is fully deductible on your 2017 tax return. If you or your spouse does participate in an employer-sponsored plan, your deduction is subject to a modified adjusted gross income (MAGI) phaseout:

  • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
    • For a spouse who participates: $99,000–$119,000.
    • For a spouse who doesn’t participate: $186,000–$196,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan: $62,000–$72,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

2. Roth. With Roth IRAs, contributions aren’t deductible, but qualified distributions — including growth — are tax-free. Your ability to contribute, however, is subject to a MAGI-based phaseout:

  • For married taxpayers filing jointly: $186,000–$196,000.
  • For single and head-of-household taxpayers: $118,000–$133,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth.

Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Maximize your tax-advantaged savings

Traditional and Roth IRAs provide a powerful way to save for retirement on a tax-advantaged basis. Contact us to learn more about making 2017 contributions and making the most of IRAs in 2018 and beyond.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

3 Keys to Mid-Year Retirement Planning Checkup

Retirement Planning, Retirement Savings Checkup, Retirement Plan, Ramsay CPA, Mahtomedi, MNWith Q2 firmly in the rearview and Q3 of the 2016 calendar year off to a strong start, now is the perfect time to review your retirement savings goals and opportunities.

From contributions to spending and net worth, give your retirement investments a mid-year checkup to make sure your retirement plans are still on track. Here are three keys to any checkup worth its salt.

1. Adjust Your Annual Contributions.

Whether you contribute to a 401(k) or to Roth IRAs, you still have time to fine-tune your annual contributions to maximize your retirement savings. If you don’t already belong to your employer’s retirement plan, join as soon as you can. If the plan allows for contributions, review your contribution amount to take advantage of the opportunity to save for your retirement.

The maximum annual salary deferral contributions allowed for 2016 are $18,000 to 401(k) or 403(b) plans and $12,500 to SIMPLE plans. If you are 50 or older by the end of the year, your plan may allow you to make additional catch-up contributions of $6,000 to 401(k) or 403(b) plans and $3,000 to SIMPLE plans.

If an employer’s retirement plan is not an option, you can still contribute toward your retirement via a traditional or Roth IRA. For 2016, you can contribute a maximum of $5,500 ($6,500 if you are 50 or older) or your taxable compensation for the year, whichever is less.

2. Rebalance Your Net Worth.

From Brexit to the immanent presidential election, this year’s events have resulted in a volatile stock market. If you are near retirement and see a big fluctuation in your net worth in 2016, perhaps you have too much invested in stocks. While the bull has stampeded throughout the US stock market in recent months, an unstable economic climate could quickly curtail the bear’s hibernation.

3. Stick to Your Spending Budget.

Many of us overspend during the holiday season, resolve to be more frugal in the new year and successfully adhere to a stricter budget for the first several months. However, much like diet and exercise resolutions, summertime can throw a wrench in our plans and reset the cycle. Mid-year is a good time to check your budget and see if you are spending too much money. Consider increasing the salary deduction percentage if you aren’t maxed out on your 401(k) contributions yet. Less cash in the bank might take a little getting used to but it will help you achieve your budgetary goals.

Confused about which retirement plan is right for you? Ramsay & Associates can analyze your needs and help you understand which plan makes the most sense for your financial circumstances. Contact us today to learn more!

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.