Roth IRA Conversions: How Do They Work? (Video)

I’m Angela Dorsey founder and financial advisor of Dorsey Wealth Management

I recently have been getting quite a few questions from my clients regarding Roth IRA Conversions.

 Roth IRA conversions have always been a good idea to consider but given that tax rates are expected to increase in the future they are getting more attention now.

 The advantage of a Roth IRA is that the money you put in grows tax-free and when you withdraw the money it is tax-free.

 Having a source of tax-free income in retirement is great, especially given that tax rates are expected to go up in the future.

 In a Roth IRA conversion, what happens is that you roll over the funds from your traditional IRA into a Roth IRA, and the amount of the rollover is added to your taxable income for the year.

 In essence, you’re being taxed now on the current value in order to make your future distributions nontaxable. This can make a lot of sense for investors who are currently in a lower tax bracket than they expect to be in during retirement.

 If you are interested in doing a Roth Conversion, be sure to talk with a financial professional to see if doing a Roth conversion makes sense for you and to create a plan to do conversions that are tax efficient and do not push you into a higher tax bracket.

 Also, there is a 5-year rule that you need to be aware of that begins with your first contribution into the Roth account to ensure that your entire withdrawal is tax and penalty-free.