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Roth IRA Rules | SHP Financial Roth Conversion Analysis

A Roth IRA or a Roth conversion can be an excellent complement to your existing retirement plan. Roth IRAs have the benefit of federal tax-free growth as well as tax-free withdrawals for you and your beneficiaries. That is because the money you contribute to a Roth IRA has already been taxed. Distributions from a Roth IRA are tax-free and penalty-free as long as the five-year aging period is met and the account owner is 59 ½ years of age or older, disabled or deceased. At SHP Financial, our advisors keep up-to-date on the latest Roth IRA conversion rules and can sit-down with you to discuss whether or not converting your traditional IRA or 401(k) to a Roth IRA may good a choice for you.

The IRS has defined income restrictions for who may contribute to a Roth IRA but anyone may convert the assets of an existing IRA to a Roth IRA. However, it is important to decide whether or not converting to a Roth IRA is the right option for you.

Taxes Implications at the Time of Conversion

When you decide to convert your current IRA assets to a Roth IRA, you will have to pay federal income taxes on the total amount you convert and at your regular income tax rate. Consulting with a tax advisor is something you will want to consider prior to converting to a Roth IRA. It is not always a perfect scenario, for example, if your tax bracket decreases during retirement, you may end up paying more in taxes with a conversion during a higher tax bracket year. However, you will have the benefits of the tax-free growth and withdrawals on those future earnings. In addition, unlike traditional IRAs, there are no minimum required distributions, or MRDs, for Roth IRAs during the lifetime of the account owner.

Time: The 5-year rule

Does converting to a Roth IRA fit in the timeframe of your existing retirement income plan? This is an important question if you plan to retire and start making withdrawals on your retirement income sources in less than five years. That is because there is a required five-year aging period on qualified distributions of a Roth IRA beginning the taxable year that the first conversion is made. In addition, each conversion into the Roth IRA has its own five-year aging period. If the five-year rule has not been met before a distribution is made, a penalty will occur. However, a distribution on the conversion principal is without penalty if the account owner is 59 ½ or older or disabled. In addition, the beneficiaries of a deceased account owner can make withdrawals, penalty-free, on both the conversion principle and earnings regardless of the five-year rule.

If you are interested in learning more about Roth IRAs and whether or not they might be a good fit for your retirement strategy, contact SHP Financial today. Our knowledgeable advisors can walk you through all the benefits and considerations when contributing and/or converting to Roth IRAs.


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