29 May Is now the right time to convert my IRA to a Roth?

Q. I have a traditional IRA funded with after-tax dollars. Would now be a good time to convert this to a Roth IRA? Because of unrealized losses in the account from the coronavirus economic shutdown, my basis in the account exceeds the account value at the moment.
— Getting ready for a move

A. After the stock market’s big fall, many investors are looking at the opportunity to convert traditional IRAs to a Roth.

The Roth IRA enjoys income-tax free growth and withdrawals for life, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

This income tax free nature extends to amounts distributed to your heirs as well, she said.

“Money left in a non-deductible IRA can be converted to a Roth IRA but is subjected to a pro-rata calculation if you have any other IRAs which are pre-tax,” D’Agostini said. “You need to look at the total of all your IRA accounts when determining the amount of tax owed if any.”

If this traditional IRA has both before and after-tax contributions, be careful to determine if it is subject to this rule as well, she said. If you make non-deductible contributions, it’s easier if you convert them right away to avoid any growth in the account, he said.

Because your non-deductible has a cost basis that is below its original value, you probably will not be subject to any tax on this if you do not have other IRAs, she said.

D’Agostini added that conversion also makes sense to start the five-year clock on your Roth IRA.

“You need to have established it for at least five years in order to avoid having to take Required Minimum Distributions at age 72,” she said. “You must have held the Roth IRA for five years in order to take withdrawals prior to age 59 ½ to avoid the 10% penalty.”

The clock starts on January 1 of the year that you make the conversion, she said.

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This story was originally published on May 29, 2020.

NJMoneyHelp.com 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.