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Is This an Opportune Time to Convert Your Traditional IRA to a Roth IRA?
Article Highlights:
Stock Markets Downward Slide
Traditional IRA to a Roth IRA Conversions
Younger Individuals
Here Is How It Works
Marginal Tax Rates
Example When Using the Marginal Table
Conversions Cannot Be Undone.
Non-deductible Traditional IRA Contributions
If your traditional IRA is invested in stocks and/or mutual funds, the recent substantial downward slide by the stock markets may provide a unique opportunity to convert your traditional IRA to a Roth IRA at a low cost, and then benefit when the markets recover.
Why would you want to do that? Because Roth IRA distributions provide tax free retirement benefits while payouts from Traditional IRAs are taxable.
Of course there is no assurance that the markets will not continue to decline, and this may not be the most opportune time to make a conversion in your specific circumstances but is something you may want to consider. Conversions provide the most benefit to younger individuals who can look forward to many years of the tax-free growth provided by a Roth IRA.
You don’t have to convert all of your traditional IRA in one year. You can convert what you can afford to pay the tax on each year.
Here Is How It Works – The tax code allows individuals to convert any portion of their traditional IRA to a Roth IRA by paying tax on the conversion as though taking a distribution from the traditional account. Thus, if you make a conversion you are taxed on the conversion based upon the tax rates that apply to your normal income plus the traditional IRA amount being converted.
Of course, if in 2022 you have abnormally lower income, that could make the conversion tax even less. The following table includes the marginal tax rates for 2022.
Marginal Tax Rates for 2022 | ||||
|---|---|---|---|---|
Marginal Rate | Filing Status | |||
Single | HH | MFJ | MFS | |
10.0% | 0 - 10,275 | 0 - 14,650 | 0 - 20,550 | 0 - 10,275 |
12.0% | 10,276 - | 14,651 - | 20,551 - | 10,276 - |
22.0% | 41,776 - | 55,901 - | 83,551 - | 41,776 - |
24.0% | 89,076 - | 89,051 - | 178,151 - | 89,076 - |
32.0% | 170,151 - | 170,051 - | 340,101 - | 215,951 - |
35.0% | 215,951 - | 215,951 - | 431,901 - | 215,951 - |
37.0% | 539,901 | 539,901 | 647,851 | 323,926 |
Other Issues:
There is no income limitation on making a conversion, thus anyone can do a conversion.
Higher income taxpayers can use the conversion to circumvent the AGI limits for contributing to a Roth IRA.
Once a conversion is made it cannot be undone.
Some individuals for various reasons have made non-deductible contributions to their traditional IRAs. For distribution or conversion purposes, all an individual’s IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable.
Give this office a call if you would like to explore the possible benefits of a traditional to Roth IRA conversion.
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Offices in Flemington, NJ and Califon, NJ
Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
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Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
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We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.
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