There are many reasons to consider
having a Roth IRA as part of your
retirement picture, and anyone can
convert a traditional IRA to a Roth IRA
in 2022. There are no income limits or
restrictions based on your tax filing
status. You generally must include the
amount you convert in your gross income
for the year of conversion, but the post-tax portion of any conversion won't be
taxed when you convert.
The conversion rules can also be used
to allow you to contribute to a Roth IRA
in 2022 if you wouldn't otherwise be able
to make regular annual contributions
because of the income limits (sometimes
called a "back door" Roth IRA). In 2022,
you can't contribute to a Roth IRA if your
adjusted gross income (AGI) is $214,000
or more and are married filing jointly
or if you're single and earn $144,000 or
more. You can contribute up to $6,000 to
a traditional IRA in 2022, or $7,000 if you're
50 or older.
The “back door” Roth conversion works
best if there are no other pre-tax IRAs.
This is because you must aggregate
all IRAs, then calculate the ratio of the
pre-tax portion relative to the total
conversion to determine the taxability of
your conversion. If you don’t have any
other pre-tax IRAs, you can simply make
a nondeductible 2022 contribution to a
traditional IRA, and then convert that
traditional IRA to a Roth IRA.
Simply notify your IRA
provider that you want to convert all or
part of your existing traditional IRA to a
Roth IRA, and they'll provide you with the
necessary paperwork to complete. You
can also transfer or roll your assets over
to a new IRA provider.
Remember that you can also convert
SEP IRAs, and SIMPLE IRAs that are at
least two years old, to Roth IRAs. And,
if you're eligible for a distribution from
your employer retirement plan, you
may be eligible to transfer or roll those
distributions over to a Roth IRA as well.
Caution: If you've inherited a traditional
IRA (or SEP/SIMPLE IRA) from someone
other than your spouse, you cannot
convert that traditional IRA to a Roth IRA.
- Current low federal tax rates. The tax
rates are scheduled to increase and
revert back to pre-2018 rates starting
January 1, 2026.
- With the markets being down year
to date, you can convert more assets
which will likely experience market
appreciation in the favorable Roth
once the markets turn around.
- Qualified distributions from Roth
IRAs are tax free (and penalty free) if
made at least five years after you first
establish any Roth IRA, and if one of
the following applies:
- You have reached age 59½ at the
time of the withdrawal
- The withdrawal was made due to
qualifying disability
- The withdrawal was made to pay
for first-time homebuyer expenses
($10,000 lifetime limit)
- The withdrawal is made by your
beneficiary or estate after your
death. Tip: The five-year holding period
begins on January 1 of the tax year for
which you make your first contribution
to any Roth IRA. Each taxpayer has only
one five-year holding period for this
purpose.
- Roth IRAs are not subject to lifetime
required minimum distribution
(RMD) rules.
- Qualified distributions from Roth IRAs
are not included when determining
the taxable portion of Social Security
benefits. (Under current law)
- It’s beneficial to have different
buckets of money with different tax
consequences to draw on during
retirement.
- Roth IRA assets transfer to non-spouse beneficiaries in a more tax
efficient manner than traditional IRAs.
There are some nuances not described
here, but your Wealth Advisor or Tax
Professional can provide further clarity
on whether or not converting some or all
of your IRA to a Roth could benefit your
long-term retirement picture.
©2022 Broadridge Investor Communication Solutions, Inc.
All rights reserved. This material provided by Donna Cator
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