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Long-Term Strategy Shift

Move your pre-tax cash and assets to a post-tax status. Pay taxes on the converted balance now to enjoy qualified tax-free distributions later.

Hedge Against Rate Changes

Income tax brackets are always subject to change. Regardless of your current tax rate, Roth conversions present the opporunity to pay zero taxes down the road.

Promote Generational Wealth

Without the burden of required minimum distributions, your self-directed Roth IRA can continue to grow well into your retirement years.

All self-directed retirement accounts provide considerable benefits, but Roth IRAs are unique. By paying taxes on your contributions and waiting an appropriate amount of time, distributions of Roth IRA earnings can be 100% tax-free. This can be true if your Roth IRA earns $5.00 or $5,000,000.

Perhaps your employer has been making contributions to your pre-tax 401(k) or you've been building a self-directed Traditional IRA. Would you like to yield the benefits of a Roth IRA without having to start over with a new account? Thanks to Roth conversions, it's never too late to put your existing retirement assets to work in a Roth IRA.

Roth conversions allow you to "switch" your account type from Traditional to Roth by adjusting the tax situation of your plan. As of 2018, there are no limits on the number of Roth conversions you may execute, nor are there limits on the dollar amounts you may convert. So, as with transfers and rollovers, you may consolidate holdings from multiple accounts as you see fit.

Upon moving your pre-tax holdings to a post-tax status, the converted balance will be added to your annual income and taxed accordingly. Once deposited into your new Roth IRA, you may invest the balance for tax-free growth as if it had been in the Roth all along.

Think of it this way: You pay taxes on Traditional IRA distributions and Roth IRA contributions. A Roth conversion effectively represents both transactions simultaneously. However, Traditional IRAs can involve early distribution penalties and you can only contribute $5,500 (if you're below age 50) or $6,500 (if you're age 50 or above) per year to a Roth IRA. Neither circumstance exists with a Roth conversion; you may convert a Traditional IRA at any age without incurring a 10% early distribution penalty. Furthermore, the converted amount will not count against your annual contribution limit for the Roth IRA.

Other Key Considerations

In-Kind Conversions

You're under no obligation to liquidate your pre-tax assets prior to conversion. Assets may be converted in kind through retitling or other simple transfer procedures. The current fair market value of your converted assets will be reported as the taxable amount.

For example, if you convert a 1 oz. gold bar with a spot price of $1,300, that's how much will be added to your income for tax purposes even though the physical item was never sold.

Qualified Distributions

You must wait five years before distributing converted cash or assets if you want to garner the full tax-free benefits of Roth IRA withdrawals. This waiting period applies even if you're already 59½ years old and it's been at least five years since your first Roth contribution.

So, even if you convert Traditional IRA holdings into a Roth IRA you've held for 10 years, you would still have to wait another five years before distributing the converted balance without penalty. If you execute another Roth conversion one year later, a separate five-year clock will begin for that balance (you'll only have to wait four more years to distribute your initial conversion).

Re-Characterizations

Until recently, self-directed investors who converted their accounts had the option of re-characterizing their holdings back to a pre-tax status. This is no longer the case per the Tax Cuts and Jobs Act of 2017.

  • Roth conversions that took place on or before December 31, 2017 may be re-characterized until October 15, 2018. No re-characterizations will be permitted after that date.
  • Conversions that occured on or after January 1, 2018 do not qualify for the October 15th deadline and may not be re-characterized at any time.
  • Re-characterizations of contributions will still be allowed. For instance, if you contribute money to a Roth IRA but would rather move it to a Traditional IRA, you may do so prior to that year's tax filing deadline.

Roth Conversion Education

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 Duration: 00:20:31

The Role of Traditional to Roth Conversions

Conversion rules are very open at the moment. This webinar helps answer the question "What should I be thinking about in terms of Traditional versus Roth?"

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