The recent market decline may present a strategic planning opportunity. Roth IRAs differ from traditional IRAs in that any growth and distributions are received tax-free. The ability to receive a lifetime of investment growth tax-free is a tremendous benefit. So much so, that government rules limit who can directly contribute based upon one’s income. The 2022 limit for married filing jointly is $204,000 of modified adjusted gross income. For single, head of household, or married filing separately the limit is $129,000.
However, the rules presently allow for anyone to convert a traditional IRA balance to a Roth IRA. The income limits don’t apply to conversions, only to contributions. You can also do a conversion within your 401(k) or other company-sponsored retirement plan so long as the plan permits. The ability to convert may change in the future as the original draft of the Build Back Better bill proposed to limit Roth conversions based upon various factors such as income or accumulated wealth. Therefore, the future of Roth conversions is uncertain, but for the time being, they are still permitted.
The way it works is that you file the appropriate paperwork with the administrator or recordkeeper of your account to convert pre-tax sourced money (or even after-tax contributions to a retirement account/plan) to Roth. There aren’t any penalties to make a conversion. However, you will owe income taxes on the amount that’s converted in the year of conversion. Also, it’s not necessary to convert all your traditional balances at one time. You’re free to do it in chunks.
So why does the current market decline present an opportunity? Because all the gain that occurs when the markets eventually bounce back will be inside the Roth account. Thus, you’re taking advantage of the current market conditions to get a higher percentage of your money to a tax-free state. This has the potential to significantly reduce your lifetime taxes. That said, this won’t be a good immediate move for everyone and should be evaluated on a case-by-case basis. Be sure to consult with your financial planner and also your tax professional to understand any tax or planning implications prior to taking any action.
Written By: Aaron M. Puttroff
https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022 https://www.fa-mag.com/news/ed-slott-says-backdoor-roths-are-back-on-the-menu-66992.html?section=3 https://www.cnbc.com/2021/10/19/heres-why-dems-proposed-elimination-of-roth-conversions-for-wealthy-doesnt-start-until-2032.html#:~:text=Currently%2C%20single%20individuals%20can't,a%20%E2%80%9Cbackdoor%E2%80%9D%20Roth%20IRA https://www.forbes.com/advisor/retirement/congress-to-end-backdoor-roth-conversions/ Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. LIVING LEGACY FINANCIAL INSURANCE SERVICES LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License Number - 0F64319, AR Insurance License Number - 9233390. | 2022-140114 Exp. 06/24 | This article was written by an independent third party. It is provided for informational and educational purposes only. The views and opinions expressed herein may not be those of Guardian Life Insurance Company of America (Guardian) or any of its subsidiaries or affiliates. Guardian does not verify and does not guarantee the accuracy or completeness of the information or opinions presented herein.