Converting to a Roth? Answer These 3 Questions First

Hi, I'm Christine Benz from Morningstar.com. Many investors have traditional IRA assets that they would like to convert to Roth. Join me to share some tips on the IRA conversion decision. He is a retirement expert and education section author. Thank you so much for being It's great to be here living in Chicago, we really appreciate it, it's great to have you here in the studio, let's talk about IRA conversions, there are a lot of moving parts here, this is a very complicated decision that many investors face . take those traditional IRAs, that's when they've been building up, convert them to Roth and enjoy those tax-free withdrawals in retirement.

Let's talk about people who are trying to make a good decision. Here is some resource I would send people to. or where they should go for advice, in case they naturally seek help from a tax advisor regarding this, they could seek a tax advisor, their own financial advisor, but

first

I would ask myself three

questions

, okay, when, what and where are we talking? Pay a tax to transfer money from an IRA to a Roth IRA, but the good thing is that the current rates are the lowest ever in China. We haven't seen rates this low, most of our X rates that don't pay the conversion RPO, okay. when the

first

question was when I asked people these three

questions

all the time when do you think you'll need the money if someone tells me well I might need it in five years don't convert the benefit of paying a tax now is the free long term compounding tax your longevity the longer you keep it in that tax free account the more it will grow and be eroded by taxes, but it certainly doesn't make up for most people paying a tax now only to withdraw the money in a few years, so yes people tell me I might need it in a few years, I'd say it's probably best not to convert and give up all that money up front, but if they say I intend to keep it for the rest of my life, remember Roth.

IRAs don't require minimum distributions that can actually accumulate and pass to beneficiaries tax-free, so the longer you plan to go out or not touch it, the more it's worth doing a Roth conversion. That's my first question, they are a minimum. amount of time I would like to have until I get married. I would know that people say I need it in five or even ten years. I would say yes, it is too short. Okay, you have to last longer because he didn't have time. snowball, you know, and all that growth is tax-free, you'd hate to stop it, cut it right after you're done paying taxes, it's not worth it, okay, look at your time horizon, yeah, the next question is what? ?

Do you think your future tax bracket will be that? That's really the most important question, but the problem with that question is that no one knows at all, but a lot of people tell me that and the accountants that you know, others advise me to say: Oh, I'm sure all the retirees think that are I'll be in a lower bracket in retirement, but if taxes go up, the lower bracket could be tomorrow's low bracket, it could be today's high bracket, so you really don't know. Plus, at some point, if you don't convert, you'll be forced to accept that IRA. withdraw money anyway at seventy and a half the going rate, if future rates go up to forty or fifty percent that can be a problem, it would be a higher rate, but it's a double whammy because if your IRA has gone well, it's a higher rate on a higher balance, so it might be worth making the effort now if you think you'll be at a higher level later, it might be worth doing worth doing now means you have There is an opportunity cost to part with some money, but look at the big picture in the long run: everything is being built tax-free and you won't have to worry about the uncertainty of what future higher taxes could do to your savings for the future.

Retirement right when you need the money most in retirement, that's not the time you want. I'm wondering how much this is going to cost me now and you say, like I said, if you don't convert, you're forced to withdraw it at 70 and a half, so what do you think your future tax bracket will be? Well, and the final question, where? Where are you going to get the money to pay the tax? If you don't have the money to pay the tax you shouldn't convert, you don't want to go broke

converting

, you know it's not for everyone, but if you have money in taxable investments that will simply be exposed to higher current and future taxes on the profits from your investments, that's the money you should use and you also don't want to use the IRA money itself, that's what I was I'm going to ask because it's a diminishing return, you're

converting

less and there's also a catch if you use the IRA money to convert, you're not converting everything and one of the great benefits of a Roth conversion is the ability to have a second chance to undo.

It's called a Roth recharacterization. Once you convert, say you convert in 2015, you have until October 15, 2016 to undo it and undo it for any reason, but you can only undo or recharacterize the amounts that were converted, so you lose the opportunity to re-convert. characterize everything if not everything was converted, so it is best not to use IRA money. It's also better to use taxable money if you don't have the money, where will you get the money? So don't convert, so don't do it. I don't read any other 401k or IRA plans oh no it's okay if you don't have it don't do it or what some people said some people said but I still like the idea of ​​having something in a Roth to hedge my bets.

That tax free account doing a little extra time is the best strategy I really mean it, I know it sounds outrageous for most accounts. I tell people to convert everything and they are surprised. I have five hundred thousand there. I cannot receive a tax bill. No. say convert everything and then remember you have until October 15th or next year to undo everything, make the entire tax bill disappear if you want, but by then you will know exactly every other item on your tax return so you can go back and not convert them. characterized back to the number you actually want to follow, say, fill in the lower tax brackets and then convert it to exactly the number you want so you can enter from the bottom.

I call it placing the bet on a horse after the race is over, so as long as you keep those completion deadlines in mind, it won't be flexible for you to undo them; In other words, the key is not how much you convert, but how much you recharacterize, or in other words, how much of the conversion you actually keep. There are situations where you look at someone, they ask you about conversion and you say yes, absolutely the situations where you say green light, do this, do this, do this, young people, okay, the biggest money-making asset you any individual can possess, it is the moment and the youth.

People have more than anyone else, but they don't take advantage of it, so of course young people starting a job should contribute, if they can, to a Roth. should convert, they probably don't have a big 401k so far. In a low tax bracket, this is the opportunity of a lifetime to start building tax free. I wish I had that opportunity. I had to pay a fortune to convert in 2010 when they opened the floodgates and repealed income limits, but young people have an incredible opportunity now, so if there is an absolute option for a Roth conversion, all young people should convert and contribute. to Roth IRA and at work, if they have the option, they should contribute to Roth 401ks instead of 401ks, so take advantage of that relatively low tax. oh yeah, besides the long time horizon, how about the opposite?

We talked about how if your time horizon is too tight, the conversion may not add up. Are there other situations? Sometimes I hear people say: Am I too old to make a good conversion? Depends on what. you are converting I would say that if you are 70 or older and you are converting yourself to get money out during your lifetime, you probably won't pay because the cost you pay up front to give you a life expectancy is probably not worth it. but for example my mother is 80 years old and she saw my show on public television, she called and said she is 88 years old, Eddie, should I do that cover?

I said mom, what do you know? It's not for you. Don't do it right. Know? First of all, she has other things, she has income, she doesn't need it, it's not for everyone, I just thought it was funny that she called and said, but if you're older and you're doing it for your beneficiaries, you have to look. in the time horizon, if you do it just for your time horizon it probably won't pay off, but if you do it for your beneficiary's time, their eyes and that could add another 50 60 70 years of attack free growth after your death, then it might be worth it, what about the obstacles you see related to conversions?

Obviously, keep an eye on what the tax bill will be associated with this conversion. Consider the time horizon. Consider whether you have outside assets to use to pay taxes. Are there any other big hurdles that you see people fall into one, well one is when you convert, obviously you open a new account, so you want to make sure you name your beneficiaries on this new Roth IRA, a lot of people miss that and He also makes sure he has his ducks in a row. you have the money, but even if you don't like it, I said convert everything, you can always undo it later, but you have to keep track of that deadline, it's a hard deadline, it's a long time, so sometimes people forget , it's October 15th of the year after the conversion, so don't let that go because you can always undo it and then some of the mistakes that people make, they don't keep track of the after-tax money that's in their IRA, you should look at it, you should be filing a form called 80606, so let's say you have a hundred thousand and you want to convert them and ten thousand of them are after taxes, you should only pay taxes on ninety thousand if you don't keep track of your f2 tax money on your IRA that comes from non-deductible contributions or Rowling's from an after-tax money plan then you are paying taxes twice on the same money so you have to be careful with that well and super complicated thing that makes you seem very, very clear, we appreciate that you're here, thank you, thank you for watching, I'm Christine Benz for Morningstar, don't worry.