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What you need to know about retirement and Roth IRA conversions

Friday, March 11, 2016   (0 Comments)
Share | 03/11/16


Q. I’m going to retire next year, and I have a traditional IRA worth $260,000 that I’m thinking of converting to a Roth. I don’t think I will need the money during my retirement, so I love the idea of giving a tax-free gift to my kids. What should I consider?
— Almost there


A. Congratulations on your upcoming retirement.


While Roth IRAs offer tax advantages, converting from a traditional IRA to a Roth could present some problems.


First, realize you will have to pay tax on the amount you are converting because the government considers the amount converted to be income, said Timothy Brunnock, a financial advisor and attorney with Trinity Financial Strategies in Morristown.


“By converting it all at one time, you will have added $260,000 to your taxable income for that year,” Brunnock said. “This means that you will pay taxes on the full $260,000 — together with any income you earn from your job.


While we don’t know your age or the amount of your annual income, such a conversion would in all likelihood move you into a higher income tax bracket, Brunnock said.


One possibility is to make the conversion over multiple years, Brunnock.


“This will ease your tax burden over time, and may keep you in a lower tax bracket,” he said.


Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany, said perhaps one of the most important factors in your decision is whether or not you can afford to fund the tax bill without hurting your retirement plan.


Green said if you choose to pay taxes from your IRA principal, converting may not provide the best long-term result.


“By paying income taxes from other out-of-pocket sources, you keep your IRA balance intact, thus allowing the converted Roth IRA to fully take advantage of tax-free growth over time,” he said.


He offered this chart, which illustrates the difference between paying taxes from your IRA in comparison to other out-of-pocket sources.

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