With the possibility of higher taxes looming a mere 3 weeks away, you may be considering some proactive approaches to your year-end tax planning.
If you are in the camp that believes taxes may be going up and are searching for ways to cut your tax bill in the future, then you probably have looked at the idea of converting your IRA to a Roth IRA.
A Roth IRA allows your contributions to grow tax deferred and if accessed properly, the distributions can be removed, this includes all growth, tax free.
Here are 5 questions to ask yourself before proceeding to help you make this important decision
When will you need the money? If the answer is soon, then maybe a conversion may not be right for you. The Roth works best when the money has a chance to accumulate tax free for a period of time, and spending it right away will defeat that purpose
Where will the money come from to pay the tax? Upon converting your IRA, you need to pay the taxes on that money this year. Since removing the money from your IRA to pay those taxes will lower the value and maybe even cause you to pay penalties, you should have other monies outside the IRA to pay the bill.
What do you think future rates will be? Do you believe that the government will raise taxes in the future? If so, then now is the time to consider this move. If not, then don't bother paying a higher tax on your money now, if you believe you will be in a significantly lower tax bracket in the future.
Other reasons to consider the conversion. You may have favorable tax attributes in this year such as large charitable deductions, carry forward losses and investment tax credits; you will not have to take required minimum distributions starting at age 70 1⁄2; you will have the ability to make contributions even after age 70 1⁄2 if there is eligible earned income; you can also provide an income-tax-free inheritance to your heirs.
Other reasons to NOT consider the conversion. You may not believe the Government will keep their word and continue to allow tax free growth in a Roth. Maybe you have decided to leave your IRA to a charity, in which case they will receive the monies tax free, so why should you pay that tax now.
This is a good start to the discussion of conversion, however it is just that, a start. You need to consult your tax professional and your financial advisor before you make your final decision, but you may want to be quick about it. The end of the year is fast approaching, and so may be the end of our record low tax brackets.
Joe Wirbick is the President of the Lancaster, PA financial services firm Sequinox. Joe specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.
Tax advice provided for informational purposes only. Tax returns should be completed in conjunction with a qualified tax professional. Sequinox Financial and JWC/JRAG do not offer tax advice and are not affiliated. Mr. Wirbick is an Investment Advisor Representative offering advisory services through Jonathan Roberts Advisory Group and securities through J.W. Cole Financial, Inc. Member FINRA/SIPC. The opinions expressed are those of Mr. Wirbick and based on information believed to be reliable but not guaranteed and subject to change and do not necessarily reflect the position of JWC/JRAG.