ROTH IRAs can be an incredible tax opportunity for many. If your income falls below certain
thresholds updated each year by the IRS, you are allowed to contribute a limited amount of your
earned income which if you follow the rules, can grow tax-free, be withdrawn tax-free and is not
subject to Required Minimum Distributions in later years. The fact that the government limits
the dollar amount of annual contributions is in and of itself an eye opener as to the potential
power of years of tax-free growth and withdrawals, or said another way, years of relinquished
tax revenue that would have otherwise been received by the federal and state taxation authorities.

A Roth IRA conversion is different than a Roth IRA contribution. A conversion is taking money
that already exists in a pre-tax Traditional IRA and converting those dollars to a Roth IRA.
Federal and state ordinary income taxes are due in full on the entire amount of the conversion, in
the year that you convert. In 2010, there was a significant law change lifting the limit on both
the amount of dollars that could be converted to a Roth IRA as well as who could convert. Now,
anyone regardless of income can convert any amount they wish. What was the incentive to
change and keep this law on the books? For the government, it generates up-front tax revenue
which would have otherwise been deferred for years by an IRA owner. Additionally, the amount
of the conversion is ADDED to ordinary income on your 1040 and can push the taxpayer’s tax
brackets higher, potentially paying a higher percentage of income tax than they otherwise would
have in that year or on future withdrawals from the IRA.

We watch for opportunities in our clients’ income tax years when their taxable income may have
taken a dip. Ebbs and flows in business income, an early retirement or a switch to a part-time
career could be opportunities to take advantage of a Roth IRA conversion. You’ll pay taxes
now, which is a win for the state and federal government’s current fiscal year, and you’ll avoid
taxes later which is a win for your future tax years. Roth conversions can be a win-win!