Is a Roth conversion the answer?


Q. I am retired and living comfortably in New Jersey, and I’m 69. I have an annuity with an annual withdrawal which is taxed. Would there be any benefit to a Roth IRA to offset some tax burden?
— Tax aware

A. There are lots of benefits to a Roth IRA, but whether it’s a smart choice for you will depend on your personal circumstances.

Here’s what you need to consider.

A Roth IRA will give you tax-deferred growth and tax-free income, and there are no Required Minimum Distributions (RMDs) from the account.

If you don’t use the money in the account, your heirs will get it tax-free.

So let’s look at the pros and cons of a Roth conversion.

“To do a Roth conversion, you need to pay the tax on that money today,” said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

Lynch said the main benefit of the Roth is that any future gain is tax-free, so in order for this to really be a benefit, the tax rates in the future need to be higher. If the tax rates are the same, or if they go lower, there is really no benefit of converting to a Roth, he said.

You’re in New Jersey now, but what’s your plan for the rest of your retirement?

“Many people move from New Jersey in retirement for better weather or a lower cost of living,” Lynch said. “Florida has no income tax and Pennsylvania does not charge income tax on retirement plan distributions.”

So if you convert to a Roth while you’re in New Jersey and you move to another state with a lower or no income tax, that may not be a very good move, Lynch said. You will need to pay a New Jersey income tax that you could have avoided.

You then need to see if the conversion bump you into a higher tax bracket.

“The 15 percent federal tax bracket goes up to $75,900 of income. If our regular taxable income is $65,000 and you convert a $100,000 IRA, you bumped your tax rate up two brackets from 15 to 28 percent, almost doubling the rate,” Lynch said. The best way to convert is to try and always convert in the same or lower tax bracket.”

Then consider your future tax rate.

If you do not need your IRA assets and will be letting those assets grow until you are forced to take distributions after you hit 70 1/2, it is likely that your taxable income will continue to get higher and higher, Lynch said. At this point, it is probably too late to start converting.

Then there’s the tax-free income for your kids.

Lynch said many people want to convert so that they can give their kids tax-free income after they die.

In the right situation that makes sense, Lynch said, but really let’s break this down.

“The purpose of the traditional IRA was to defer income taxes as long as possible. A Roth conversion means that you are pre-paying the taxes for your kids’ inheritance,” he said.

That may or may not make sense for you.

Take some time and really walk through the issues with someone who understands taxes before you make a big move, Lynch said.

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This post was first published in December 2017. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.