Are Roth IRA Conversions for You?

Are Roth IRA Conversions for You? by Stephen GannsA Roth IRA can be a very helpful part of a complete retirement income plan. The tax benefits are wonderful:

  • Tax-free income in retirement
  • Flexible withdrawal options
  • Prepaid income tax for beneficiaries
  • No required minimum distribution

However, until 2010, Roth IRA conversions were off-limits for high-income earners. Roth IRA “contributions” are still not allowed for those whose modified adjusted gross income exceeds $191,000 for married couples filing jointly, or $129,000 for single taxpayers in 2014.

Now, however, through Roth IRA conversions, high earners can tap into the benefits of the Roth IRA.

So how do I do a Roth IRA conversion? And why should I do a Roth IRA conversion?

Many things now depend on Adjusted Gross Income (AGI), for instance:

  • How much Social Security is taxable
  • Whether the 3.8% Medicare tax has to be paid
  • Capital gains tax rates

Money taken out of a regular IRA adds to the AGI and is taxable. Money taken out of a Roth IRA, however, does not add to AGI and is not taxable. This may mean that other types of income get taxed at lower rates, and those benefits can be substantial.

The wonderful thing about having a Roth IRA when you retire is that all contributions and all growth amounts are entirely tax-free.

What are the benefits of a Roth IRA conversion?

There are two ways one can benefit from converting regular IRAs to Roth IRAs:

1. Low-income year

If this year you have tremendous business losses or events like that, you might want to consider doing a conversion of your regular IRAs. Convert them, and you’ll be able to take the money out later in life, tax-free. (These losses mentioned above do not apply to losses from capital gains, because you can only deduct $3,000 of those.)

2. 401k or 403b, but no IRAs

The other way to benefit applies to those of us who currently have 401k’s or 403b’s.

For example, since I own my own business, I have a tremendous amount of SEP and simple IRAs. My wife, however, who worked as a teacher, had nothing but 403b’s and 401k’s. At the end of the year, I can make a non-deductible IRA contribution for her. I say non-deductible since she’s not allowed to deduct a traditional IRA, because she participates in a 403b. I can make that contribution and then immediately convert it to a Roth IRA. That money will then be in a Roth IRA, and all growth will be tax-free.

The reason I cannot do that for myself is that according to the IRS, when you open up a non-deductible IRA and want to convert it, you can’t just convert the non-deductible portion. You have to merge it, so to speak, with all your other IRAs, simple, SEPs, and regulars. Once merged, only a small portion will be non-taxable.

However in the case of my wife, all of her conversion will be non-taxable, and when she takes that money out later in life, she will get the benefits we spoke of earlier.

If you have any further questions about IRA conversions, you can consult your tax preparer or call us anytime at 914-682-7007.


Stephen J. Ganns

Stephen J. Ganns, CPA


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