Since it was first introduced as part of the Tax Relief Act of 1997, the Roth IRA has been immensely popular, particularly for individuals who expect to have the same or a higher marginal tax rate in retirement. Unlike the traditional IRA, a Roth IRA is funded with after-tax dollars. That means that there is no tax deduction in the year you make the contribution, but you won’t pay taxes on the contribution when you withdraw it (provided the Roth IRA has been open at least five years and you are 59 1/2 years old, disabled or have died).
There are also provisions that allow you to convert a traditional IRA to a Roth IRA. It is important to understand that, when you convert the traditional IRA to a Roth IRA, the taxable amount of the traditional IRA will be added to your income for that year and will be subject to taxation at your marginal tax rate (unless you did not take a deduction when you made the traditional IRA contribution).
The new tax law, known as the Tax Cuts and Jobs Act of 2017 (TCJA), has brought into law the lowest tax rates in nearly a century (and probably the lowest most individuals will see in their lifetimes), making it a great time for many people to convert a traditional IRA to a Roth IRA. The TCJA applies the new lower rates to 2018, so you can convert your traditional IRA in 2018, pay the tax at the new lower marginal tax rate, and not have to worry about paying taxes on your contributions in the future. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA.
You will want to pay attention to how much you convert to a Roth IRA – transferring too much can take you into a higher tax bracket. There is an effective strategy to avoid that, though –spread the conversion of your traditional over a number of years, so that you stay in the lower tax bracket. Be advised, though, that, unlike prior law, any conversions made in 2018 and moving forward cannot be reversed. You can reverse a 2017 conversion up until October 15, 2018.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to the age of 59 1/2 or prior to the account being open for five years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal. Please consult with your tax advisor before investing.
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At The Pinnacle Financial Group, we have provided professional risk management advice to individuals and businesses in New York and Connecticut for two decades. We understand the critical role insurance planning plays in your financial future. We will carefully explain your options and the different strategies available to you, so that you can make the right decisions for you and your loved ones.
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