Optimizing After Tax Wealth During a Volatile Market: Roth Conversions

What is a Roth Conversion?

A Roth Conversion is transferring assets in kind from a traditional IRA to a Roth IRA.

Why are Roth Conversions advantageous?

The benefits of a Roth account are –

• Tax-free growth that can boost long-term wealth
• no RMDs (required minimum distributions)
• important tool for estate planning
• prevent heirs from inheriting a large tax bill

Why is a volatile market good for a Roth Conversion?

When transferring assets in kind during a volatile market when the market is down –

• the value of those assets is lower
• the taxes owed on the conversion are lower
• the value of the assets could go up in the future

Essentially, an individual has transferred more future value than he/she is paying taxes on at the time of converting in a down market.

How do I complete a Roth Conversion?

An effective Roth Conversion may be a one-time transaction or it may be a series of transactions over time. Ultimately, completing a Roth Conversion is a decision that requires the input of an accountant and a financial advisor.

Are there any additional considerations to completing a Roth Conversion?

Depending on tax rates, making a Roth conversion is not advantageous. This is a conversation that an individual should have with their CPA to ensure they are making a good decision.

Investment values changes depending on market timing, so before making a Roth conversion, an individual should talk to an investment advisor about whether the timing is right.

An investor should consider what their motivation is for making a Roth conversion. If they are simply thinking about ensuring their heirs do not pay taxes, then they should work with a financial advisor, CPA, and estate attorney to discuss whether a Roth conversion is actually the best option for them.

Roth conversions are one tool that investors can utilize to invest tax-efficiently.

Securities offered through Avantax Investment ServicesSM, Member FINRA,SIPC. Investment advisory services offered through Avantax Advisory ServicesSM. Insurance services offered through an Avantax affiliated insurance agency.

Rushton and Avantax are not affiliated.

Tax services are provided by Rushton are separate and apart from Avantax.

The strategies mentioned may not be appropriate for all investors. Please consult your financial and/or tax advisors to determine a strategy that works best for you.

The views and opinions presented in this article are those of Rushton and Rushton Wealth Management and not of Avantax Wealth Management® or its subsidiaries.

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Past performance is not a guarantee of future results. Neither diversification nor asset allocation can assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets.

While tax loss harvesting can be a valuable strategy, its effectiveness depends on your individual financial situation and tax circumstances.

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.

Converting from a traditional IRA to a Roth IRA is a taxable event.

A Roth IRA offers tax free withdrawals on taxable contributions.

To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

Tax Free – Income may be subject to local, state and/or the alternative minimum tax.

Real Estate disclosure: Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.