The Benefits of Roth Conversions with Brandon Baiamonte | Mission Wealth

hello my name is brandon bayamonti i’m the director of tax strategy at mission wealth and today we’ll be discussing roth conversions before we get to that topic let’s first discuss the differences between a traditional ira and a roth ira our traditional ira allows you to make pre-tax contributions you can get an immediate tax benefit although there are income restrictions the contributions grow tax deferred until you take money out any distributions from the account are taxed at ordinary income tax rates there may be a 10 penalty on early withdrawals although the penalty doesn’t apply after reaching age 59 and a half you generally must take a required minimum distribution when you reach age 72. a traditional ira met may be best for those expecting to be in a lower tax bracket when taking distributions in summary our traditional ira allows you to receive a tax benefit today and also receive tax deferred growth you make after-tax contributions with a roth ira this means you don’t receive an immediate tax benefit but both your contributions and earnings grow tax-free in other words you can take distributions without paying any income taxes there may be a 10 penalty on early withdrawals although the penalty doesn’t apply as long as you’ve reached age 59 and a half and have had a roth ira open for at least five years there are also no required minimum distributions during the account holder’s life a roth ira may be best for those expected to be in a higher tax bracket when taking distributions in summary a roth ira doesn’t provide a tax benefit today but you enjoy tax-free distributions in the future a roth conversion occurs when you convert a traditional ira to a roth ira the conversion amount is taxable in the current year at ordinary income tax rates should you do a roth conversion it depends on a number of decision factors which include 1. current views versus future tax bracket those who expect to be in a higher tax bracket in retirement will likely benefit from converting consider the timing of receiving your social security income it sometimes makes sense to convert after your tire but before receiving social security what will your required minimum distributions rmds be and what effect will those have on your marginal income tax bracket a benefit of doing a roth conversion is reducing or even eliminating rmds in the future in addition your beneficiaries won’t be subject to income taxes when they take distributions two time horizon the longer money remains in a roth ira the longer any earnings can grow tax-free remember that rmds are not required for roth iras during the account holder’s lifetime but they are for traditional iras three funds from other sources are funds available to pay the taxes from converting it’s better if taxes are paid from non-ira sources you need to make ira distributions is to meet your living expenses if you don’t then you may benefit from converting four reduction of taxable estate if your state is large enough to be subject to federal and or state estate taxes the income taxes paid from a roth conversion will reduce your taxable estate 5. tax diversification having funds available from multiple sources such as traditional ira roth ira and taxable brokerage accounts in retirement gives you flexibility in managing your marginal income tax bracket and have greater control of how much income tax liability you have to you will have to pay for any given year six non-deductible contributions if you have made significant non-deductible contributions to your traditional ira then this will reduce the amount of income taxes paid on conversion to a roth let’s now discuss several situations in which a roth conversion probably doesn’t make sense these include one you anticipate being in a lower tax bracket in the future 2. you plan to bequest give away ira assets to charity 3. if you have a child applying for college and seeking financial aid four increasing income from the conversion might result in additional taxes or reduced deductions and credits examples of this include the net investment income tax the child tax credit medical expenses and medicare part b and d premiums five roth conversions can no longer be re-characterized per the 2018 tax cut to jobs act conversions are therefore irrevocable and so don’t convert unless you are sure as you can see there are numerous factors that will help you determine whether a roth conversion makes sense please discuss this with your financial advisor and cpa and every situation is unique at mission wealth we help you explore the most cost effective solutions to help cover a number of possibilities we are a fiduciary for our clients and have no proprietary products to sell and no quotas to fill we simply offer independent objective advice that serves your best interests we offer experience and resources that can help create a total coordinated picture our advisors can provide objective advice that aligns your financial position with your biggest dreams and aspirations our tax management services include estate tax reduction strategies an annual tax management review concentrated stock planning as well as integration and coordination with your cpa on tax savings strategies you can find more information by visiting mission wealth dot com slash tax management your client advisor at mission wealth is available to help coordinate with your tax advisor and is a great resource to help plan for and implement this and other strategies if you don’t have an advisor but would like to learn more you can contact us by phone or via our website an advisor will be in touch please visit www.missionwealth.com to learn more thanks for watching i am brandon bayamonti director of tax strategy at mission wealth and in this video we discuss roth conversions we hope you have a great day you