Have you heard of a Roth Conversion? Well, it is the process by which a traditional (regular) IRA is exchanged to a Roth IRA regardless of income levels. So why would you do this? Basically, a regular IRA is an account designated for retirement that was typically funded with pre-tax (tax-deductible) contributions*…and distributions from the account are considered taxable income during retirement. A Roth IRA provides no tax-deduction for contributions, but under current law, you will NOT pay taxes on any distributions*.

Since 1998 regular IRA’s could be converted into Roth IRA’s…the IRA owner included all pre-tax contributions and earnings from the IRA on the tax return. So if the converted IRA was worth $20,000 and was comprised entirely of pre-tax contributions and earnings, the $20,000 would be included as income on the tax return. But subsequent gains on the new Roth account would not be taxable*….the goal is to pay tax on today’s dollars but avoid taxes on hopefully a much larger account later.

Roth conversions enable potentially huge tax benefits for your future…after you make the money back you lost to taxation. If I may offer my humble and longstanding opinions: Almost NEVER volunteer to pay taxes today for a promise of tomorrow and expect them to change the taxation of Roths down the road (as they did, for example, with Social Security).

*exceptions and other details apply; please refer to IRS rules and guidelines

Toomey Investment Management a boutique wealth management firm partnering with mid to high net worth individuals, families and businesses.