Every week, Allworth Financial’s Steve Hruby, CFP, and Bob Sponseller, ChFC, answer your questions. If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to yourmoney@enquirer.com.
Kevin in Loveland: How do I know when it’s a good time to do a Roth conversion?
Answer: Generally speaking, it makes the most sense to consider a Roth conversion when your current tax rate is lower than what you expect it to be in the future. That’s because when you convert traditional IRA assets into a Roth IRA, you’ll pay taxes on the converted amount now, but any future growth and withdrawals (if qualified) are tax-free.
One potentially smart time to do this? When the market is down. If your portfolio has taken a hit, you’re essentially converting assets at a discount. You’ll pay tax on the current, reduced value rather than what it was when the market was higher. Plus, you’ll be setting yourself up for tax-free growth when markets eventually recover. It can also make sense to do a Roth conversion in a lower-income year, like if you’re between jobs, recently retired or your income is temporarily reduced. This kind of timing could put you in a lower tax bracket, so the tax hit from the conversion could be smaller.
With all that said, Roth conversions aren’t one-size-fits-all. The tax bill is real, and it’s best to pay it with money outside your IRA if possible. If you don’t have funds to do this, that could be a no-go. Depending on your age, you’ll also want to keep an eye on your adjusted gross income. A boost to this could trigger some significant ramifications, such as higher Medicare premiums, a change in your Social Security taxation and more.
Here’s the Allworth Advice: A down market and a lower tax year can create a great window of opportunity for a Roth conversion. But it’s essential to run the numbers to make sure the timing – and the conversion, in general – really makes sense for your overall plan. If you need help, we recommend reaching out to a fiduciary financial advisor or tax professional.
Rich and Wendi in Butler County: We have $2 million saved. Should we set up a trust for our family?
Answer: The short answer? Probably, yes. You’re already in a strong financial position, and a trust can help protect what you’ve built. While there’s a general misnomer that trusts are only for the ultra-wealthy, they’re actually practical tools a wide range of people can use to provide more control, privacy and flexibility in how assets are managed and passed down. (One huge benefit? A trust can help your family avoid probate.)
There are different kinds of trusts (revocable, irrevocable, etc.), and which one makes sense for you depends on your goals, whether that’s minimizing estate taxes, protecting assets or simplifying the process for your heirs.
The Allworth Advice is that a trust can help ensure your assets are used how you intended and keep your loved ones from dealing with unnecessary complications. For families with meaningful savings, that kind of planning can go a long way. It’s worth sitting down with an estate planning attorney and a financial advisor to talk through your options (keeping in mind that, ideally, your estate plan strategy should be integrated into your overall financial plan).
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Retirement planning services offered through Allworth Financial a SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Visit allworthfinancial.com or call (513) 469-7500.
This article originally appeared on Cincinnati Enquirer: Allworth Advice | When do Roth conversions make sense?
Reporting by Steve Hruby and Bob Sponseller / Cincinnati Enquirer
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