Post Eagle Newspaper


Sep 30, 2023

69°F, clear sky
New Jersey

Time Now


Roth: To Convert or Not To Convert

The retirement savings you are working hard to build now will one day become your retirement income, helping to fund the lifestyle you envision. But have you considered the impact that taxes may have on your retirement goals? One approach to managing taxes in retirement is to include a tax-free account— such as a Roth IRA—in your portfolio.

Roth IRAs offer several benefits. Rather than paying taxes when you withdraw the funds in retirement, you pay taxes on the funds when you invest in a Roth IRA. If you have a Traditional IRA or an employer-sponsored retirement plan, now may be a good time to consider converting those assets to a Roth IRA. There are a number of reasons listed below why, depending on your personal financial situation, converting an existing retirement plan or Traditional IRA to a Roth IRA could help you meet your financial goals.

You don’t expect to need all of the funds when you retire.

With a Traditional IRA, you must stop contributing and start taking minimum distributions from your account at age 70½. Roth IRAs have no such age restrictions: there’s no contribution cutoff, provided income requirements are met, and no rule that you must begin tapping your account at age 70½. Your funds have the potential to grow tax-free as long as you want and you gain greater control over your income in retirement. You can tailor withdrawal amounts to your actual income needs—or eliminate them altogether in any given year.

So if you are past age 70½ and would like to quit taking those required minimum distributions, you may still have the option to convert some or all of your IRA into a Roth, allowing those funds to have the potential to grow tax-free for your own needs later in life or for your heirs. Note that you will need to pay taxes on the taxable amount of the IRA at the time of the conversion, so you should review this option carefully with your tax advisor before electing to convert to a Roth IRA. Also, the funds may only be converted after any current year required minimum distributions have been withdrawn.

You want to leave a lasting financial legacy to your heirs.

If you won’t need your IRA to fund your retirement income, a Roth IRA can be an effective wealth planning tool, since heirs can enjoy continued asset growth potential without paying taxes when they withdraw assets. By using a “stretch IRA” strategy, you can extend the tax-free growth potential and tax-free income benefits of your Roth IRA. This works by taking advantage of the fact that, while the beneficiaries of your Roth IRA (other than your spouse) will be required to take minimum distributions annually after your death, those distribution amounts will be calculated using a life-expectancy factor based on their own age, not your age. This may allow more of the funds to remain in the account longer, continually reaping the benefits of tax-deferred growth potential.

You’re concerned about taxes.

You are aware that diversifying your portfolio by investing in multiple asset classes, including stocks, bonds and cash, can be a way to mitigate risk. The same logic applies to tax diversification: spreading your retirement assets across different types of accounts provides diversification. A tax-free Roth account combined with a taxable account, like a brokerage account or mutual funds account, and a tax-deferred account, like a 401(k) or Traditional IRA, can give you the flexibility to potentially keep taxes low in retirement. This is especially important if you’re concerned about future tax increases or you think that your tax liabilities may be higher in retirement. Converting some of your Traditional IRA to a Roth IRA can be an effective strategy that allows you to take income from different sources to potentially keep taxes low in retirement.

 You think that you might need some of the money before you retire.

If you withdraw funds from a Traditional IRA before age 59½, not only will you be taxed on the value of the funds withdrawn, you will also be subject to a 10% early-withdrawal penalty unless an exception applies. With a Roth IRA, you can withdraw the original contribution at any time, without penalty. You can even withdraw earnings, but if you do not meet the requirements indicated below regarding the length of time held, age and other considerations, you will be taxed on the earnings when you withdraw the funds.

The Facts: Roth IRA vs. Traditional IRA

RothTableA few additional points to consider:

•            When you convert from a Traditional IRA or employer-sponsored plan to a Roth IRA, you will incur certain tax liabilities. These include taxes on any pretax contributions plus taxes on any earnings or growth.

•            If you have pre-tax and after-tax funds in a Traditional IRA, there are certain rules that determine how these funds can be converted. Your tax advisor can help you determine which funds can be converted and the amount of taxes due on a conversion.

•            It’s important to identify funds outside the IRA that can be used to pay the taxes due on the conversion to a Roth IRA. Tapping into the amount converted from a Traditional IRA or employer-sponsored retirement plan to pay taxes will reduce the amount available in the Roth IRA to earn tax free income—and trigger a 10% penalty if you’re under age 59½ (unless an exception to the penalty tax is available).


Get help making your decision.

To help you understand how a Roth conversion will likely affect your financial scenario, I can provide a customized Roth Conversion Analysis for you. This report explores your specific situation, factoring in such variables as the amount to be converted, the distribution year, your date of birth and where you are in the retirement planning cycle. Based on this input, the report shows the after-tax future value of an IRA balance, comparing the outcomes of a Traditional IRA with those of a Roth IRA. You’ll also be able to see the wealth planning advantages of “stretching” a Roth IRA. Finally, as with all tax-related issues, you should also discuss your situation with your tax advisor.

If you’d like to learn more, please contact Irene F. Stolarz.
Article by Morgan Stanley Smith Barney LLC.
Courtesy of Morgan Stanley Financial Advisor.
Articles are published for general information purposes and are not an offer or a solicitation to sell or buy any securities or commodities. This material does not provide individually tailored investment advice.  Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives.
Morgan Stanley Financial Advisor(s) engaged The Post Eagle to feature this article.
Tax laws are complex and subject to change.  Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in a written agreement with Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under an IRA.
The appropriateness of a particular strategy will depend on an investor’s individual circumstances and objectives.
Ms. Stolarz may only transact business in states where she is registered or excluded or exempted from registration (see  Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Ms. Stolarz is not registered or excluded or exempt from registration.
© 2013 Morgan Stanley Smith Barney LLC.  Member SIPC.
CRC 666908 (05/13)