August 22, 2019

Part 3: When Should I contribute/Convert to a Roth IRA?

Last week I covered why you want a Roth IRA and some of the benefits of getting tax-free growth and income. This week I wanted to cover who should be contributing to a Roth, when those contributions should be made, and also who should look into Roth Conversions and when.

Roth Contributions
When does it make sense to contribute to a Roth IRA/401k vs a Traditional IRA?

  • Below the income threshold
  • Single/Head of Household phase-out starts at $120k MAGI
  • Married phase-out starts at $189k
  • In the same or lower tax bracket now than you will be in retirement
  • If you can pay the taxes now(while you’re working) and have the money grow tax-free, or save the taxes now but pay taxes on everything you contributed AND the growth later…your better off paying them now while in a low tax bracket.
  • Based on your Retirement Blueprint you will be able to shield more of your Social Security Benefit by having tax-free income in retirement
  • Building up your Roth IRA/401k gives you access to tax-free income in retirement that will allow you to keep some/all of your SS tax-free. Depending on your income need and your streams of income you can benefit greatly by having tax-free income from your Roth that will not only get you a dollar for dollar net in your pocket income from your portfolio (at least the Roth portion) it will also help keep your other streams of income in a lower tax bracket as well.

Roth Conversions
How about doing Roth Conversions, when does that make sense and for whom?

  • Have more pre-tax monies than you need
  • The main date to look at with this is your 70-1/2 birthdate. If at that time you will have pre-tax money that will cause a RMD (Required Minimum Distribution) that is larger than your income need-Do Roth Conversions before you get to that point.
  • Have space in your current tax bracket
  • If you are in the 22% tax bracket (currently up to $169k for married filing joint in 2019) but your taxable income is only $140k than it can make sense to “convert” or move some of your pre-tax (traditional IRA/401k) funds over to your Roth IRA. By doing this you will stay in the same bracket you are now, while lowering your future tax burden by lowering your future RMD.
  • Want to lessen the tax burden on your beneficiaries.
  • A strategy to help ensure that the legacy you leave behind is only a blessing and not also a curse is to have Roth IRA funds being inherited along with your Traditional IRA funds. By doing this you will allow your heirs to use the Roth IRA money to pay the tax bill they will owe when receiving the Traditional IRA funds. Especially if you are in a lower tax bracket than your beneficiaries (or will be at the point they inherit) then it can make a lot of sense to pay the taxes now at a lower rate.

I hope through this series that you have been able to get a better understanding of the benefits a Roth IRA can provide. As always advice is best given when it is based on you specifically. If you would like more detailed advice based on your situation please contact me and I will be happy to help!

Securities offered through Kalos Capital, Inc. and Investment Advisory Services offered through Kalos Management, Inc., both at 11525 Park Woods Circle, Alpharetta, GA 30005, (678) 356-1100. C. Curtis Financial Group is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.