Tax Changes in 2018: Is it time to consider converting some of your IRA balance to a ROTH IRA?
The new tax law has doubled the standard deduction and eliminated or changed other deductions. So, many may be taking the standard deduction. IF your tax bracket or net effective tax rate is lower this year, you may want to consider converting some IRA assets to ROTH IRA.
Converting IRA to a ROTH IRA is taxable!
See if your net effective tax rate makes it beneficial to convert some IRA assets to ROTH IRA. You may want to spread out the conversions over the next few years under current tax law. Year 2025 are when laws are due to revert back to the old rules.
Why convert? ROTH IRA growth is tax deferred and withdrawals are tax free after age 59 ½.
Conversion to a ROTH IRA is not reversible!
You may want to wait toward the end of the year when you will have better estimate of taxes due to income, etc. Once you convert IRA assets to a ROTH IRA, you are not able to change it back to an IRA.
ROTH IRAs are not subject to Required Minimum Distributions (RMD) at age 70 ½ and beyond.
One of retirees biggest “costs” are taxes along with healthcare.
With IRA’s and other “qualified” money, you have to start taking RMDs at age 70 ½. RMDs are taxable.
Additionally, IRAs passed on to children and grandchildren are also subject to them having to take RMDs no matter their age. You can pass ROTH IRA assets to children and/or grandchildren which they can get RMDs income tax free
Be sure to consult with your tax advisor before doing any changes or conversions of IRAs to ROTH IRAs.
The conversion does increase income in the year when it occurs. While the conversion is not subject to the 3.8% net investment income tax, by adding the conversion amount to income it could cause that tax on other income for the conversion year.
Current Tax Law
As we all have seen, tax laws are subject to change over time. Proactive planning may help you take advantage. Will ROTH IRA income continue to be taken tax free? Let’s hope so. We use the tax laws that are current to plan. The current (new) tax law will require each of us to consult with our advisors to see if any changes or action is beneficial.