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Ballast Advisors Blog

Roth IRA Conversions: Finalizing Your
Plans Before Year-End

Hello there! As we bid adieu to this year, it’s a golden opportunity for savvy investors and retirement planners to give their strategies a once-over, particularly when it comes to Roth IRA conversions. Gone are the days when income limits kept some from the Roth IRA scene. Since 2010, everyone, regardless of income, can join in. This offers a workaround for high-income folks who find the Roth IRA doors closed due to income caps.

At Ballast Advisors, we’re committed to guiding you through these complex decisions, ensuring that your financial journey aligns seamlessly with your long-term goals. Let’s unpack the ins and outs of these conversions, weighing their benefits and drawbacks.

Understanding Traditional IRAs vs. Roth IRAs

First off, let’s clear the air about what traditional and Roth IRAs are:

Traditional IRA: Think of it as a savings buddy that nudges you to save for retirement with tax perks. In 2023, you can stash away up to $6,500 (or more if you’re 50+). If married, double that! Contributions might lower your tax bill now, and your earnings grow tax-deferred. However, Uncle Sam will want a slice of your pie when you start withdrawing.

Roth IRA: Here’s another pal helping you save for the golden years, but with a twist. The same contribution rules as traditional IRAs apply, but with income caps. You pay taxes upfront, so when it’s time to dip into these savings, it’s all yours, tax-free, if you play by the rules. This is super appealing, especially if you’re expecting to be in a higher tax bracket later on.

Both of these are just vessels. You choose the investment goodies to fill them with. Also, remember, your total annual contribution to all your IRAs can’t go over $6,500 (plus any catch-up contributions, if applicable).

Why November is Key for Roth IRA Conversions

November isn’t just about turkeys and pies; it’s a crucial month for Roth IRA conversions. December 31st is your cutoff. Converting before the year wraps up means it counts towards this year’s income, a savvy move for tax strategizing.

Pros of Roth IRA Conversions

Tax-Free Growth: Once you convert, your investments grow tax-free. This can be a huge plus, especially if you’re betting on significant growth over time.

No RMDs: Roth IRAs don’t hassle you with required minimum distributions, letting your money grow peacefully for longer.

Tax Diversification: With funds in both traditional and Roth accounts, you’re better equipped to handle your tax situation in retirement, picking and choosing withdrawals based on your tax bracket.

Cons of Roth IRA Conversions

Upfront Tax Bill: Converting means paying taxes now on the converted amount. This could be hefty, depending on your IRA size and tax bracket.

Five-Year Holding Period: Any withdrawals from a converted Roth IRA need to sit tight for five years to be tax-free.

Market Risk: If your converted assets dip in value post-conversion, you’re stuck having paid taxes on a higher amount.

Conversion Tips

When considering a Roth IRA conversion, it’s essential to analyze your current tax bracket. If you find yourself in a lower bracket now but expect to climb higher in the future, converting could be a wise strategy. It’s key to remember that the amount you convert typically folds into your gross income for that year. However, any nondeductible contributions you’ve made to your traditional IRA sidestep taxation during conversion.

You also have the flexibility to convert your IRA partially, spreading the tax impact over a longer period rather than bearing it all at once. However, be mindful of the Pro-Rata Rule, which can complicate things if you have a mix of pre-tax and after-tax dollars in your IRAs. Understanding how this rule applies to your situation is crucial. While it’s generally advised not to try timing the market, converting during a market downturn might work in your favor, potentially reducing your tax liability and setting the stage for future growth.

The process itself is straightforward: just let your IRA provider know you’re ready to switch from a traditional to a Roth IRA, and they’ll guide you through the paperwork.

The Back Door Roth IRA Strategy

This also opens an avenue for those who otherwise couldn’t contribute to a Roth IRA in 2023 due to income limits, cleverly known as a “back door” Roth IRA strategy.

For instance, if you’re married and filing jointly earning above $228,000, or single earning over $153,000 in 2023, you’re typically outside the Roth contribution bounds. But here’s a workaround: make a nondeductible contribution to a traditional IRA (up to $6,500, or $7,500 if you’re 50 or older) and then convert it to a Roth IRA.

There’s more flexibility too. You can convert SEP IRAs and SIMPLE IRAs (provided they’re at least two years old) to Roth IRAs. Even certain distributions from employer retirement plans like 401(k)s or 403(b)s can be transferred or rolled over into a Roth IRA, provided you’re eligible for these distributions.

This holistic approach offers a smart way to navigate the sometimes complex terrain of retirement planning, keeping your long-term financial health in focus.

Why You Need a Financial Planner

While Roth IRA conversions offer tantalizing benefits, they’re not simple. You’ll need to weave them into your overall financial tapestry with care. This is where a financial planner shines. They can tailor advice to your situation, considering your current finances, future aspirations, and tax implications. They’ll help you time your conversion, weigh partial vs. full conversions, and aim for an optimized retirement strategy with minimized tax impacts.

As year-end nears, it’s prime time to chat with a financial planner about Roth IRA conversions. Don’t forget: December 31st is your deadline. Strategic decisions now could make a world of difference for your future finances.

At Ballast Advisors, we’re passionate about guiding you through Roth IRA conversions. Whether you’re in the sunny climes of Florida or enjoying the seasonal changes in Minnesota, our team of seasoned financial planners is here to help, aligning your retirement planning with your long-term dreams. Reach out to us today, and let’s make your retirement planning shine.


The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. Past performance is not indicative of future results. Nothing contained herein is an offer to purchase or sell any product. This material is for informational purposes only and should not be considered investment advice. Ballast Advisors reserve the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.