Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
Roth IRA Conversion: 2023 May Be Your Year
Published Date : January 31, 2023
January 31, 2023
If you have been considering a Roth IRA conversion—which is simply a transfer of assets from a Traditional (tax-deferred) IRA to a Roth (tax-free) IRA—but have been hesitant because of the associated tax bill, 2023 might provide just the moment you have been waiting for. With expanded tax brackets now in place thanks to inflation, you can convert more without jumping into the next tax bracket. And with the current tax cuts from the Tax Cuts and Jobs Act (TCJA) of 2017 set to expire at the end of 2025, you will likely pay Uncle Sam less now than you would on the same transaction in the future.
While the sale on taxes can be a compelling reason to consider a Roth IRA conversion on its own, the current market conditions have made it even more appealing. Transferring assets, either cash or securities in-kind, from your Traditional IRA now while they are still at depressed levels (due to the challenging down market of 2022) allows for the eventual recovery to occur in the Roth IRA.
You might be thinking, let’s get this conversion going! But before you dive in, it’s important to consider if it’s truly right for you and supports your larger estate planning goals. A Roth IRA conversion isn’t appropriate if your IRA assets will go to charity at your passing or you intend to process all required distributions through Qualified Charitable Distributions. In both scenarios, you would be pre-paying a tax bill that would never materialize. Additionally, a conversion doesn’t make sense if you know you’ll need your IRA during your lifetime and are likely to spend it down. It’s better to just pay the taxes as you go if that’s the case.
If you think you’ll need to wait until after age 59½ to take advantage of a Roth conversion to avoid the 10% penalty for early withdrawals, you’re in luck. There is a special IRS provision which allows for conversions at any age, but with some important caveats. The entire distribution from the Traditional IRA must be deposited to the Roth, and it must remain there for at least five years. And if you have taxes withheld on the converted amount, be prepared to pay a 10% early withdrawal penalty on the tax withholding in addition to the taxes themselves. Likewise, if you attempt a withdrawal of converted funds from the Roth IRA for any reason, the 10% penalty will be triggered. Fortunately, the 10% early withdrawal penalty goes away completely once you’re over age 59½.
The ideal candidate for a Roth Conversion:
- Has most of their assets in tax-deferred accounts and is looking for tax diversification.
- Believes they will be in a higher tax bracket in the future.
- Has the cash on hand—outside of the IRA—to pay the taxes due on the conversion.
- Wants to pass tax-free assets to their heirs.
If this sounds like you, reach out to your Sand Hill Wealth Manager to start the conversation about a Roth IRA conversion. You will want to be certain that it makes sense for your specific situation as the ability to just say “oopsy daisy!” and undo a Roth conversion no longer exists thanks to the TCJA. When it’s done, it’s done, and the taxes could be due as early as the next quarterly estimated tax payment date.
If you’ve considered conversion in the past but haven’t crossed it off your to-do list yet, just think how satisfying it will be to get that done and early in the new year, too. There may be no time better than the present.
Sources: Charles Schwab, Barron’s, IRS
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