Although many clients and advisors are jumping at this opportunity (to convert Traditional IRA’s to Roth IRA’s), there are a number of factors that must be examined, including the possibility that a client will have extraordinary home assistance and medical expenses that will, in effect, be payable from taxable retirement plan accounts on a tax-free basis.
This is an issue that can only be considered taking into consideration long term comprehensive financial planning. The decision to convert a traditional IRA to a Roth IRA depends on many factors.
Sometimes, the average retiree may not want to convert to a Roth. Oftentimes their income is low enough and expenses in the future can be offset enough not to warrant the conversion costs.
Idea in Action
let’s consider this scenario: you have $100,000 in an IRA and your income sources include a pension and social security. In this case, there are no extra assets to pay the conversion tax. It’s also likely that the income tax bracket is low enough that simply taking the required minimum distribution may be a better tax strategy than the lump sum conversion.
At age 70 1/2, the required minimum distribution would be under $4,000. Converting $100,000 to a Roth would likely put this hypothetical person in a higher tax bracket. Furthermore, if medical expenses are incurred, and income is planned properly (e.g. using an annuity strategy), then deductions could be maximized keeping taxes low.
Another option in partial conversion – where part of the $100,000 is converted each year. Making the choice here really depends on the following factors:
- gross income, adjusted gross income, and taxable income
- existing tax deductions
- how you wish to plan for possible future medical expenses
- availability of free cash if conversion is desired
- your age
- your estate planning wishes
- and many other factors
Bottom line again – decide if a Roth conversion makes sense only after a comprehensive financial planning analysis has been done and you have planned your retirement income strategy, your cash flow planning (budgeting), future expenses, and your health profile, among other things.
Don’t Know What to Do?
If you are facing a situation like this, and don’t know what to do, give me a call. We have helped people at all levels in this matter. If you would first like some questions answered give us a call – 781.393.0021 or send us a quick contact and we can go from there. Thanks for stopping by!
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