More Reasons to Convert Your IRA Funds to a Roth Account

January 28, 2022

Today, we have a public service announcement.

As the end of the year approaches, there are a few deadlines that are approaching as well. One of which is nothing out of the ordinary, but the other two might paint a little bit of a grim picture for the future of self-directed IRA investing.

These deadlines mainly have to do with Roth conversions.

What is a Roth Conversion?

It’s the process of taking money from a pre-taxed IRA, like a traditional IRA, a SEP IRA, or a simple IRA, and converting that account into a Roth IRA where your investment growth is completely tax free.

Let’s say you took $5,000 and put it into one of these pre-taxed traditional SEP or simple IRAs. Then, if you grow that $5,000 into $50,000 ultimately at retirement age, you’re going to be responsible for paying tax on the full $50,000.

Now what smart investors might do, if it makes sense for them, is they’ll take their traditional SEP or simple IRA at $5,000 and convert it into a Roth IRA.

This procedure allows you to pay income tax solely on the amount you converted.

At that point, you can make the same investments, and grow that account to be $50,000.

So now that $50,000 is completely free and clear of capital gains tax – just like any IRA – but also free of income tax at retirement age as well.

Simply put…

When you’re doing a Roth conversion, you’re paying tax on the seed instead of the harvest.

The IRS Changes for Last Year

Next, we’re going into the proposed changes that might be coming to Roth conversions next year.

The deadline we’re talking about is December 31st, 2021. With the current administration’s new infrastructure bill making its way through Congress, there are some changes in there that might be coming to IRAs and specifically Roth conversions:

Possible Income Limits: Depending on if you exceed certain income limits as a single tax filer or as a joint tax filer, you would no longer be able to make Roth conversions after December 31st.
No In-Plan Conversions: We could possibly see the end of the In-Plan Roth conversions to your company sponsored 401k’s.

In-Plan Roth Conversions

Within your 401k, when your employer puts money in, they’re taking a tax deduction for that amount and as the employee, you may elect to have Roth deferrals come from your paycheck.

Now there would be two buckets of money that are being created within that 401k: the pre-taxed; the deductible employer contribution, and the post-taxed; your employee Roth deferrals from your paycheck.

Currently, you can take that employer pre-taxed contribution and convert it over to the Roth component of that 401k plan and all your investment growth is tax free.

Coming next year though, we could possibly see the end of that In-Plan Roth Conversion. Those two potential changes are important to take into consideration as we approach the end of the year.

So if you have a company sponsored 401k that currently allows for plan Roth conversion and that’s something that you want to do to get your investments growing tax free, you need to make that Roth conversion by the end of the year.

The Roth Conversion Deadline

We mentioned earlier a deadline that is not necessarily out of the ordinary.

This is just for Roth conversions in general. Should this bill pass or not (that’s still up in the air), there still is a deadline associated with making Roth conversions just for this year.

Since a Roth conversion is a taxable event, it does apply to whatever calendar year that it took place in.

If you’re looking to make a Roth conversion so that you’re able to pay income tax on that conversion this coming tax filing season, that also needs to be done by December 31st of this year.

What Does This Mean For You?

So with all these deadlines in mind, what does this mean for you, the self-directed IRA investor?

You need to seriously consider if a Roth conversion is right for you.

Now, there’s many different considerations to make before doing a Roth conversion. We’ve got another video that does cover these considerations to make. Check that video out as well!

If you want more details about the proposed changes and the regular Roth conversion deadline, IRA specialists like myself at NuView Trust company are more than happy to tell you whatever you need to know:

● What should you expect coming in the future with these IRS deadlines?
● What does a normal Roth conversion look like?
● How should you make the considerations for a Roth Conversion?Now Is The Time To Take Action

Now Is The Time To Take Action

Get with your tax advisor, make those considerations, find out if a Roth conversion is right for you.

They may be going away in the future! Give Congress an inch and they will take a mile.

We don’t know if it’s going to be a slippery slope from here on out.
So do it while you can and get those self-directed investments growing completely tax free.

If you have any questions about Roth conversions, contact us at NuView.

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