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Roth Conversion Tax Treatment

To convert or not to convert roth

When it comes to the Roth IRA, that is the question

Depending on your circumstances, a tax-free Roth Individual Retirement Account (IRA) may be worth considering. Anyone, regardless of income, can convert to a Roth IRA from a Traditional IRA. The difference between the two is the tax treatment. With a Roth IRA you pay income taxes on the amount you contribute; with a traditional IRA, you pay income taxes when you withdraw your money.
Some Roth IRA basics Like a traditional IRA, the Roth IRA offers tax-deferred growth—plus these additional retirement benefits: • Qualified tax-free distributions • The ability for individuals with earned income to make their own and spousal contributions past age 70½ • No required minimum distributions (RMDs) for account holders, and generally for spousal beneficiaries • Generally tax-free RMDs for a non-spouse beneficiary that can be stretched over his or her lifetime. The stretch IRA feature can significantly increase the amount heirs receive

Things to consider Roth Contributions

• There are income limits for annual Roth contributions (for 2020 these are $196,000 to $206,000 for married couples filing jointly and $124,000 to $139,000 for singles and heads of household)

• You will have to pay income tax on the taxable portion of the assets you convert to a Roth IRA, but you will not have to pay the 10% early distribution penalty

• Paying the taxes due on a Roth IRA conversion from money you have outside of your IRA, and not from your IRA assets will keep more money in your Roth IRA

• The potential benefits of a Roth IRA relates to your income tax bracket in retirement. If you expect that bracket to be lower, converting to a Roth IRA may not be a better option • If you expect to be in a higher bracket, converting to a Roth IRA now may help reduce your tax burden later

Here’s how the Roth IRA conversion strategy works

Roth IRA conversion Timing

• If you’re not ready to convert today, you can still convert to a Roth IRA at a later time. You can also choose to convert only a portion of your traditional IRA assets.

• The more time you have until retirement, the greater potential for tax-free growth from a Roth IRA

Roth IRA conversion Distributions

• Any distribution you take from your Roth IRA will first come from money not subject to taxes or penalties, even if you are not yet eligible for a qualified distribution. A pro-rata rule for conversions If you convert from a traditional IRA, SEP-IRA, SIMPLE IRA or rollover IRA that contains both pre-tax and after-tax assets, here is an example of how the taxable portion of the conversion is determined:

If your IRA is valued at $400,000, comprised of:

• $360,000 (90%) in pre-tax assets
• $40,000 (10%) in after-tax assets

If you choose to convert a portion (e.g., 25% or $100,000) of those funds to a Roth IRA, the conversion amount will be taxed as follows:
• $90,000 (90%) converts and is taxed
• $10,000 (10%) converts tax-free

If you have multiple IRAs (traditional IRA, SEP-IRA, SIMPLE IRA or rollover IRA), this ratio will be based on the combined pre-tax and after-tax assets from all of your IRAs. Each account is not treated separately.
Let’s have a conversation The decision to convert to a Roth IRA involves complex tax issues. Let’s explore your options and evaluate with your tax advisor whether a Roth IRA conversion makes sense for your financial plan.

Your life today is much bigger than your investments. And achieving your life’s goals is being challenged in new ways. By the realities of a longer retirement. The demands of caring for aging parents. The threat of online identity theft. And the financial burden of longterm healthcare. Your UBS Financial Advisor can help you understand how all the moving parts of your life can fit together to help you pursue what’s important— including determining if a Roth IRA conversion is right for you. It’s what we call: Advice. Beyond investing.

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