www.qns.com I LIC COURIER I JULY 2017 43
BY JOHN SAVIGNANO
Want to convert a traditional IRA to
a Roth? Be sure you take tax reform
President Trump and the GOP-con-trolled
Congress want to lower tax rates
and scrap many deductions as part of
their desire to overhaul the tax system. If
they’re not able to pass comprehensive
reform, than odds are they’ll settle for
temporary tax cuts without all the trap-pings
of a broad overhaul bill.
Present and future tax rates are key
in figuring whether a Roth conversion
makes sense. If you expect the tax
rate you’ll pay in retirement will be the
same as or higher than the rate on the
conversion, then switching to a Roth
can pay off taxwise, as long as you don’t
have to tap IRA funds to pay the tax bill
on the conversion. If your tax rate in
retirement will be lower, tax-free Roth
payouts are less advantageous. You’ll
pay more tax on the conversion than
you’d save later on.
Most would be wise to delay Roth
conversions until tax changes are en-acted,
which may very well not happen
until sometime next year. You don’t want
to convert at this year’s 39.6% maxi-mum
rate only to see the top rate fall in
2018 to around 35%. But if you want to
gamble, you can convert now and undo
the switch later…provided you act timely.
You have until October 15 of the year
following the conversion to transfer the
funds back to a traditional IRA. This is
called a recharacterization.
Let’s turn to other factors to consider
when pondering a Roth conversion. You
don’t need to convert the entire amount
to a Roth in one swoop. You can transfer
the money in increments over time and
space out the tax hit.
Converting can pay if you have IRA
assets that you expect will soar in value.
Switching to a Roth before the assets
appreciate will result in a lower conver-sion
tax. The same rationale applies
if you have IRA assets that now are
depressed in value.
There’s no required distribution from
Roths when you reach 70 ½. Keep in
mind, though, that if you are 70 ½ or
older at the time of conversion, you’ll have
to take an RMD for the year of the switch
because the required payout is based
on your traditional IRA balance at the
end of the immediately preceding year.
The additional income from converting
can trigger higher Medicare premiums.
Individuals owe a monthly surcharge on top
of their regular parts B and D premiums
if their modified adjusted gross income
exceeds $85,000…$170,000 for joint
filers. Income from converting to a Roth
is included when calculating modified AGI.
Doing a Roth switch this year, for example,
could lead to higher premiums in 2019.
IRA to a Roth