Expert Perspectives

Squire provides complete and personalized accounting solutions to meet your individual needs.

Expert Perspectives

Squire provides complete and personalized accounting solutions to meet your individual needs.

Is This an Opportune Time to Convert Your Traditional IRA to a Roth IRA?

Article Highlights:

  • Stock Markets Downward Slide
  • Traditional IRA to a Roth IRA Conversions
  • Younger Individuals
  • Here Is How It Works
  • Marginal Tax Rates
  • Example When Using the Marginal Table
  • Conversions Cannot Be Undone.
  • Non-deductible Traditional IRA Contributions

If your traditional IRA is invested in stocks and/or mutual funds, the recent substantial downward slide by the stock markets may provide a unique opportunity to convert your traditional IRA to a Roth IRA at a low cost, and then benefit when the markets recover.

Why would you want to do that? Because Roth IRA distributions provide tax free retirement benefits while payouts from Traditional IRAs are taxable.

Of course there is no assurance that the markets will not continue to decline, and this may not be the most opportune time to make a conversion in your specific circumstances but is something you may want to consider. Conversions provide the most benefit to younger individuals who can look forward to many years of the tax-free growth provided by a Roth IRA.

You don’t have to convert all of your traditional IRA in one year. You can convert what you can afford to pay the tax on each year.

Here Is How It Works — The tax code allows individuals to convert any portion of their traditional IRA to a Roth IRA by paying tax on the conversion as though taking a distribution from the traditional account. Thus, if you make a conversion you are taxed on the conversion based upon the tax rates that apply to your normal income plus the traditional IRA amount being converted.

Of course, if in 2022 you have abnormally lower income, that could make the conversion tax even less. The following table includes the marginal tax rates for 2022.

Marginal Tax Rates for 2022
Marginal Rate
Filing Status
Single HH MFJ MFS
10.0% 10,275 14,650 20,550 10,275
12.0% 41,775 55,900 83,550 42,775
22.0% 89,075 89,050 178,150 89,075
24.0% 170,050 170,050 340,100 170,050
32.0% 215,950 215,950 431,900 215,950
35.0% 539,900 539,900 647,850 323,925
37.0%

Example When Using the Table – Let’s say you are filing single and your taxable income without an IRA conversion amount is $45,000, which has a marginal rate of 12%, and you are converting $40,000. This brings your taxable income to $85,000, which is still in the 12% bracket (it’s more than $41,775 but less than $89,075, the start of the next rate). This means the tax on the conversion would be $4,800 (12% of $40,000). If you did the conversion in a year when your other income was more and when combined with the conversion amount you are in the 22% bracket, the tax on the conversion would be $8,800, $4,000 more than when you are in the 12% bracket.

Other Issues:

  • There is no income limitation on making a conversion, thus anyone can do a conversion.
  • Higher income taxpayers can use the conversion to circumvent the AGI limits for contributing to a Roth IRA.
  • Once a conversion is made it cannot be undone.
  • Some individuals for various reasons have made non-deductible contributions to their traditional IRAs. For distribution or conversion purposes, all an individual’s IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable.

Give us a call if you would like to explore the possible benefits of a traditional to Roth IRA conversion.