Common Roth IRA Questions, Part 2 – Conversions
Mark is back this week with a brand-new Weekly Webinar meant to help you navigate your finances and achieve a financially secure retirement. In this week’s webinar, Mark goes through the Slott Updates, spends a few minutes on market updates, and then delves into today’s topic which is part two of a three-part series he’s doing on common Roth IRA Questions. For this second installment, Mark discusses Roth Conversions.
For the Slott Group updates, Mark discusses updates related to retirement plans, particularly the Secure 2.0 regulations. He received an update from Ironberger about the catch-up rule in retirement plans, which originally required high-income earners to use the Roth portion of their 401(k)s for catch-up contributions, causing issues due to the absence of a Roth option in all plans. The IRS granted a two-year extension for compliance, shifting the effective date of the rule from January 1, 2024, to January 1, 2026. This extension means that until 2026, no employees are compelled to make catch-up contributions in the Roth format and plans lacking Roth contributions won’t need to offer them. Mark also touches on a Congressional drafting error in Secure 2.0’s mandatory catch-up provision that led to the accidental deletion of a part of the tax code; however, the IRS acknowledged this mistake and won’t enforce it.
Mark also addresses audience questions, such as the impact of Secure 2.0 on distributions for a firefighter considering retirement at age 57 and clarifies the extension of exceptions for certain public safety employees. Another question concerns an older plan participant considering an in-service rollover to an IRA while still working, and the response outlines the rules regarding required minimum distributions and rollovers.
Moving on to touch on updates we’re seeing with the markets, Mark begins by talking about the housing market, where there’s a focus on existing home sales, revealing a 2.2 percent month-over-month decrease and a 16.6 percent year-over-year drop in sales of previously owned homes. Despite a modest 1.9 percent increase in the median price of sold homes compared to the previous year, the supply of homes for sale has decreased by 14.6 percent. This decline in supply, despite rising mortgage rates, could potentially sustain home prices in the near term. Mark also highlights the fluctuations in the stock market, such as the strong earnings report from Nvidia, which wasn’t reflected in the stock price due to selling, and warnings from retailers like Macy’s, Dick’s Sporting Goods, and Foot Locker about consumer spending constraints. A discussion on the recent statements by Federal Reserve Chairman Powell at Jackson Hole suggests the possibility of interest rate increases due to continued progress toward the two percent inflation target. Mark also details the market performance of various indices, including the Dow Jones Industrial Average, S&P 500, and NASDAQ, along with insights on global markets and the bond market.
Mark then moves into the Financial 15 portion of the webinar where he delves into Roth conversions and their benefits. He begins with a brief explanation of what a Roth conversion is, how it works, and what benefits it has, before answering some of the common questions surrounding Roth conversions. Mark confirms that anyone with a traditional IRA can convert it to a Roth IRA, as long as the retirement plan allows it. Unlike contributions, conversions aren’t affected by income phase-out levels. The dollar amount for a conversion can be chosen as desired—either the entire amount at once or split over time for a more strategic tax approach. There are no limitations imposed by the IRS on the amount converted. Conversions can be performed at any point in the year, effective from January 1st, but should be completed before December 31st. Custodians may have deadlines earlier than December 31st. While paying tax on the converted amount is inevitable, strategic planning can help manage the tax liability, possibly aligning with one’s standard deduction to minimize tax impact.
Mark then takes time to explain the calculation of taxes associated with Roth conversions. He emphasizes that the amount of tax paid depends on various factors, including your taxable income and tax brackets. He provides an example using a married filing jointly scenario, demonstrating how the blended tax rate can be determined by considering the different tax brackets. He also explains that the amount of tax paid can be managed strategically by adjusting the conversion amount. For instance, choosing to convert an amount that aligns with the top of a lower tax bracket can be beneficial. This approach enables individuals to control the tax implications of the conversion.
Furthermore, Mark addresses the timing of tax payments for Roth conversions. He discusses the two fundamental options: withholding taxes from the conversion amount or paying the tax amount from other sources, such as earnings or taxable savings. He also stresses the importance of not waiting until the following year’s tax filing deadline to address the tax liability associated with the conversion. Instead, he recommends making estimated tax payments in the appropriate quarters to avoid penalties.
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The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Attleboro Wealth Management, LLC is a Registered Investment Adviser. This program is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Attleboro Wealth Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Attleboro Wealth Management, LLC unless a client service agreement is in place.
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0:00 – Introduction & Upcoming
07:18 – Slott Updates
16:10 – Market Update
29:00 – The Financial 15: Roth Conversions