By Scott Hamilton, CFP®
Do you wish to save more of your hard-earned cash and expand your retirement fund?
A Roth conversion could be the answer. By moving your money from a regular IRA to a Roth IRA, you could grow your savings and take tax-free withdrawals later.
But is a Roth conversion right for your financial plan? At Hamilton Financial Planning, LLC, we believe in giving you all the information you need, so you can make smart financial choices for your specific situation.
Let’s explore the differences between a traditional and Roth IRA, understand what a conversion involves, and figure out if it could be beneficial for you.
Table of Contents
Traditional vs. Roth IRA
A traditional IRA provides a tax benefit on the front end, meaning qualifying individuals enjoy a benefit sooner rather than later. Contributions are made with pre-tax money. Come tax time, the contributions made over the last year are fully or partially tax-deductible based on income and whether you or your spouse is covered by a work-sponsored retirement plan.
Here’s a breakdown based on tax filing status:
- Single: The tax deduction phases out for those who are covered by a workplace retirement plan and have an adjusted gross income ranging from $77,001 to $87,000.
- Single: The tax deduction is available for any amount of AGI if the taxpayer is single and not covered by a workplace retirement plan.
- Married: The tax deduction phases from $123,001 to $143,000 for the spouse making traditional IRA contributions with a work retirement plan.
The 2024 max annual contributions into a traditional IRA is $7,000 (or $8,000 for those over 50). A traditional IRA also comes with a required minimum distribution (RMD), beginning April 1 after your 73rd birthday. (Note: Under the SECURE 2.0 Act, that RMD age will rise to 75 in 2033.) Ignoring the RMD will land you a hefty penalty fee.
On the contrary, a Roth IRA provides a tax benefit once you’re ready to withdraw the funds. The money you fund your Roth account with is taxed prior to depositing. When it’s time to cash in, you will not be assessed any further taxes on the initial investment or the gains.
Unlike a traditional IRA, there is no RMD associated with a Roth IRA. You may also withdraw contributions at any time. But be careful to not withdraw any of the gains before you’re 59½ years of age to avoid a 10% penalty fee.
Roth IRA Conversion and Taxes
A Roth IRA conversion is when you move funds from a traditional IRA into a Roth IRA. In the case of a Roth IRA conversion, you’re ultimately deciding the tax benefits of the Roth are superior to a traditional IRA, based on your financial scenario.
But how is that determined? Consider the tax bracket you are in today. Now take a moment to consider which tax bracket you may be in when it’s time to retire. Would you rather pay taxes at today’s rate? Or the anticipated rate of the future? Answering these questions is the simplest way to determine if a Roth IRA or traditional IRA better suits you.
What About Income Eligibility Caps?
There are income caps associated with who is or is not able to contribute to an IRA. Here’s a summary of Roth IRA eligibility based on your modified gross income:
Single Tax Filing Status:
- $138,000 or less: You can contribute the maximum limit.
- $138,001–$153,000 range: You can contribute a reduced amount.
- Over $153,000: Not eligible
Married Tax Filing Status:
- $218,000 or less: You can contribute the maximum limit.
- $218,001–$228,000 range: You can contribute a reduced amount.
- Over $228,000: Not eligible
What if you see yourself in a higher tax bracket in the future but you’re not eligible to contribute to a Roth IRA? Is there a way to still take advantage of the Roth account tax benefit? At first glance, it may seem as if you’re out of luck. But in reality, there are no income limits associated with a Roth IRA conversion.
Is a Roth IRA Conversion for You?
If you have a traditional IRA but believe you’ll ultimately be in a higher tax bracket once you’re ready to withdraw your funds, then a conversion may be for you.
And if you’re still unclear on the answer, it’s normal to have questions about which retirement account is best for you. Anything to do with taxes can get complicated quickly! But remember, you don’t have to figure it out alone.
We at Hamilton Financial Planning, LLC can help you decide if a Roth conversion is right for you and guide you through the process. Take the first step toward a stable retirement by setting up a free consultation. Schedule a complimentary get-acquainted meeting online or reach out to us at 512-261-0808 or scott@hamiltonfinancialplanning.com.
About Scott
Scott Hamilton is founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees. With over 20 years of experience in the financial industry, and having completed over 250 financial plans for retirees across all industries, but mostly the oil and gas industry, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals. He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.
