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4 Common Misconceptions About Roth IRA Conversions

 

Some people think that high-income earners aren't eligible for a Roth IRA (individual retirement account). This is not true. There was an income cap for conversions in the past, but that was removed and now anyone can convert a traditional IRA to a Roth IRA, regardless of income. 

Here are four other misconceptions about Roth IRA conversions:

Myth: Conversions automatically put you in a higher tax bracket.

It's true that pretax dollars converted into a Roth are considered taxable income, but you aren't automatically bumped into a higher tax bracket simply by converting. 
You can minimize the tax impact by spreading out the conversion over a few years. 

Myth: You should only convert when you're young.

It is true that it usually pays to convert sooner rather than later, because the sooner you convert to a Roth, the sooner you begin accumulating tax-free earnings. But everyone's financial situation is unique. Here are some scenarios that you will want to work through with your financial and tax advisers:

1. If you'll be in a higher tax bracket at retirement, you might benefit by converting several years before retirement. Your tax hit could be more than offset by savings you'd see down the road.

2. If you anticipate your income dropping significantly in a certain year (and increasing in following years), consider converting in the low income year while you're in a lower tax bracket.

3. If you knew that tax rates were going up the following year, you could save income tax by converting in the current year.

Myth: You can only convert once a year.

The IRS only looks at the total amount converted every year. It doesn't matter how many conversions you initiate. Contrast this with tax-free IRA rollovers between two separate traditional IRA accounts, where you must wait a year before initiating additional rollovers from or to an account.

Myth: Once you convert, you can't go back. 

Unhappy with your Roth IRA conversion? You can reverse it until October 15 of the following tax year. The IRS "recharacterizes" your Roth account back to traditional IRA status and you’re back where you started with no penalty. Conversions can seem confusing, but the IRA specialists at Sunmark are ready to help. Stop by or call us today at 1-866-SUNMARK.