Roth IRA Conversions by Hills Bank Trust and Wealth Management Group | Part 3 in a 4 Part Series
Individual Retirement Accounts There are two basic types of Individual Retirement Accounts (IRAs)—Traditional and Roth. Contributions to a Traditional IRA may be tax deductible. Roth IRA contributions are not tax deductible, but grow tax-free:
Required Minimum Distributions
Early Withdrawal
Pay Taxes?
Growth
Withdrawals
Traditional
Later
Tax Deferred Penalty+Taxes Pay Taxes
Yes
Age 70 ½
Age 59 ½
Today
No penalty to withdraw contributions, but may pay penalty+taxes on earnings.
Roth
Potentially Tax Free
Tax Free
No
Now
Roth IRA Conversions A Roth conversion turns a Traditional IRA into a Roth IRA. Once funds are converted, the earnings will grow tax-free. Generally, a Roth IRA is an excellent choice when one or more of the following applies to you: 1. You like the idea of future investment earnings growing tax-free, at the cost of paying taxes now. 2. You think your tax rate in retirement will be higher than it is now. 3. You want to avoid taking required minimum distributions (RMDs), required by the IRS at age 70½ from traditional IRAs. Steps for a Roth IRA Conversion There are three simple steps to a conversion: 1. Open a Roth IRA if you don’t have one. 2. Decide on the amount to convert: you aren’t required to convert all your traditional IRA funds at once. You choose the amount to convert that works best for you. 3. Complete a transfer form. A Few Things to Consider You will owe taxes on the amount that you convert. Traditional IRA funds have not been taxed, so the portion that is converted to a Roth IRA will be counted as ordinary income in the year in which the conversion occurs. The amount you convert might move you into a higher marginal tax bracket.
Under the Tax Cuts and Jobs Act, you cannot undue a Roth conversion—once converted, the funds cannot be switched back to a traditional IRA if your tax situation changes.
If you think that a Roth conversion might be appropriate for you, reach out to your tax advisor.
To speak with a Hills Bank Trust and Wealth Management Officer about your retirement, call 1-800-899-8858 or visit us at www.hillsbank.com/RetirementPlanning. Investment products are not a deposit, not FDIC insured, not insured by any federal governmental agency, carry no bank guarantee, and may go down in value. Neither Hills Bank and Trust Company or any of its employees are authorized to give legal or tax advice. Individuals are encouraged to seek the guidance of their own personal legal or tax counsel. Source: IRC § 408(8)(2017). IRC § 213 (2017). IRC § 170 (2017).
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