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January 27, 2021



The Roth IRA Conversion: Is It Right For You?

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The Roth IRA was designed to provide tax benefits, but it’s often viewed as primarily an investment tool for younger investors. This is because there are income limits to contributions, and it’s generally assumed that income – and hence taxes – will be lower during the earlier stages of a career. For investors close to and in retirement, it can also be an effective tool, if it’s accessed by converting other assets and care is taken in how the conversion is paid for.

Converting Existing Assets from Traditional Retirement Accounts

The Roth IRA benefits are plentiful but here are the noteworthy ones:

  • allows investments to grow tax-free
  • distributions are not taxed
  • no required minimum distributions

Combined, these benefits can be part of a successful retirement plan, one that ensures you can invest for the growth your long-term plans need, while still managing your income in a way that creates tax efficiency.

Traditional IRAs and 401(k) plans require minimum distributions (RMDs) to be taken, starting at age 72. The amounts of these change from year to year, and they are taxed as income. This can have knock-on effects and potentially increase taxation on other income, such as social security, if it pushes you over income limits. Besides the tax implications, your investment strategies must be managed around the need to generate cash for distributions, which can force you to liquidate at points where you might prefer to stay invested. This can impact your long-term returns.

By converting these accounts to Roth IRAs, you eliminate RMDs. This may allow for more effective tax management strategies. It also means that you can keep more assets in longer-term illiquid or growth strategies, as there isn’t a need to plan for distributions beyond what you need for income.

It can also make estate planning easier, as the SECURE Act, signed in 2019, ended the so-called “stretch IRA” which allowed IRA assets to be passed to heirs without requiring the inheritor to pay RMDs. All assets in inherited traditional IRAs must now be distributed within ten years[1].

The When and the How to Pay for It Matters

To avoid a big jump in income in any one year, which can impact social security taxes and also result in you having to pay a Medicare surtax, it may make more sense to set a plan to complete the rollover over the course of several years, so that you can manage the impact to income and taxes.

Since, as mentioned above, gains in a Roth IRA do not carry a tax burden, returns on a Roth IRA may be higher. Funding a conversion from taxable assets, such as those in a brokerage account, can increase returns over time. The returns from the brokerage account are reduced by the amount of tax paid, while the returns in the Roth IRA earn a pre-tax rate. If you haven’t reached age 59 ½, it’s particularly important to use taxable assets as withdrawing from the traditional IRA or 401(k) will trigger a 10% tax penalty.

Final Word

Even if you did not set up a Roth IRA at an earlier stage of your career, the Roth IRA benefits provided can still be an effective tool in retirement. It just requires some careful planning to manage the conversion from a traditional IRA or 401(k), to be sure it works for your situation.

[1] https://www.marketwatch.com/story/the-secure-act-changes-the-way-people-will-inherit-money-are-you-affected-by-the-new-rules-2019-12-27

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC.– Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. –  Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. – Theorem Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. Third party posts do not reflect the views of Theorem Wealth Management or Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and have not been reviewed for completeness and accuracy. All further communications from this representative must be sent from and received by johnathan@theoremwm.com. For additional information, please refer to one of the following consumer websites: www.FINRA.orgwww.SIPC.org.

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