One element of the Roth IRA that may spark questions from taxpayers is the issue of converting an existing deductible Individual Retirement Account (IRA) into a Roth IRA. Perhaps one of the more important factors in your decision on whether or not to convert to a Roth IRA is how you will choose to pay income taxes at the time of conversion.
If you choose to pay taxes from your IRA principal, converting may not provide the best long-term result. In fact, by paying income taxes from out-of-pocket sources, you keep your IRA balance intact, thus allowing the converted Roth IRA to fully take advantage of tax-free growth over time.
If you’re financially capable of paying the income taxes “out of pocket,” you should consider a Roth conversion. However, before you proceed, it’s important to consult with your financial professional to assist you in a careful review of your options. That way, you can better determine if a Roth conversion is in your best short- and long-term interest.
While there is much talk about the effectiveness of this strategy, the most important thing to do before pulling the trigger is to work with your financial advisor or tax advisor to understand the short-term and long-term tax implications of conversion. Another essential item to consider is your Roth IRA’s role in your larger retirement strategy. Roth IRAs come with limitations, from annual contribution limits to early-withdrawal fees and are likely not an end-all-be-all solution for most investors.
This material is intended for educational and informational purposes only. It is not intended to provide specific advice or recommendations for any individual, nor should it be construed as tax advice. Additionally, you should consult with your Financial Advisor, Tax Advisor or Attorney on your specific situation. The views expressed in the material are that of the author and do not necessarily reflect those of any market, regulatory body, State or Federal Agency, Association. All efforts have been made to report or share true and accurate information. However, J.L. Bainbridge & Company, Inc., is unable to verify the content and the content is subject to change and become materially inaccurate without notice. For additional information about J.L. Bainbridge & Company, Inc., (CRD # 108058) please visit the SEC Website at www.adviserinfo.sec.gov. For a copy of the firm’s ADV Part 2 Brochure and or Form CRS, please contact us at 941-365-3435.