While Roth IRAs didn’t exist until 1997, Roth conversions are now one of the most powerful tools for long-term tax planning. But they come with some surprising risks that can wipe out years of compound growth if you’re not careful. Hi, I’m Ken Hargreaves, president of WealthGen Advisors. And today, we’re going to go through four common mistakes I see when doing Roth conversions.
1. Rushing the conversion: Converting too close to when you need the funds can lead to surprise penalties and taxes. Once you convert, you have to wait five years to touch those funds, regardless of age or retirement status.
2. Avoiding the step transaction doctrine: Avoid making a series of conversions that could be recharacterized by the IRS. The more time between steps, the better.
3. Misjudging tax brackets: Converting too much at once could push you into a higher tax bracket and disrupt your tax plans.
4. The pro-rata rule: If you have both pre-tax and after-tax funds in your traditional IRA, the IRS requires conversions to include a proportional amount of both, which could increase your taxable income and potentially bump you into a higher tax bracket.
Roth conversions can be powerful, but one wrong move could cost you. Remember, seek advice from a certified financial planner and tax professional before triggering a conversion. As always, thanks so much for watching.
