How to save for retirement, the options available, and/or when/how to open a retirement account is unique for each individual. A number of factors have to be considered and for this reason it can be a difficult process to find the options that are most beneficial for you. No guarantee or warrantee is made that any of the information submitted or referenced here will be suitable, profitable, or prove successful. Other retirement saving options exist that may be better suited to your individual needs. Please consult a professional, including, a financial, tax, legal and/or human resources professional before implementing anything referenced herein.
The information presented here is not intended to be regarded as a comprehensive list of retirement plans, considerations, including but not limited to, categories, services, or qualifications that a client or prospective client should consider when assessing or comparing retirement plans or retirement accounts. As the author of this piece, EP Wealth Advisors, LLC (“EPWA”) has tailored the messaging of this article to align with the categories, services, qualifications, capabilities and services that it offers and can service. EPWA makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. EPWA reserves the right to make changes to some or all of the information displayed here without notice.
The need for and type of retirement account that an individual or employer require are specific to the uniqueness of everyone’s circ*mstances. The referenced material identified herein is limited in nature and angles towards accounts and plans that align with the services offered by EPWA. There is no guarantee or warrantee that the services offered by EPWA will satisfy your financial service’s needs. Services offered by other advisors may be more suitable to your specific needs.
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Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professionals. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice. Please consult a professional financial, tax, legal and/or human resources professional before applying any of the approaches or strategies made referenced directly or indirectly here.
All investment strategies, including retirement accounts and plans, have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. The risk of loss can never be eliminated even if working with a professional.
After meeting your RMD, you can reinvest additional IRA funds into a ROTH IRA to keep growing tax-free. EP Wealth Financial Advisors can determine if you qualify and guide you through the process. Call or connect online to find an advisor near you. If you’ve reached the age where you’re required to take yearly distributions from your IRA, but you have other income sources to cover your expenses, you might consider reinvesting additional funds once you have satisfied your required minimum distribution (RMD.) This conversion can potentially allow your money to grow tax free and your beneficiaries to inherit these assets tax-free.Converting Traditional IRAs to Roth IRAs After Meeting Your RMD
Let’s explore the guidelines of Roth IRA conversions to help you assess if this move is right for you.
What Is an RMD?
A required minimum distribution (RMD) is the amount of money that a qualified retirement account owner or participant of retirement age must withdraw every year from one of the following retirement plan or account types:
- Employee-sponsored retirement account
- Traditional IRA
- Simplified Employee Pension Plain (SEP) or
- Savings Incentive Match Plan for Employees (SIMPLE IRA)
RMDs are calculated by dividing the fair-market value of the account at the end of the year by your life expectancy as estimated by the IRS.
Roth IRAs
The Roth IRA can be a good option for some as they conduct their retirement and estate planning because you don’t have to pay income tax on the growth of your wealth. That’s because you invest your money post taxes, so you have already paid your dues.
With a traditional IRA, you contribute funds pre-tax dollars; however, any money withdrawn in the future is taxed as regular income, not based on the lower long-term capital gains rate.
With a Roth IRA, you don’t get an initial tax break, but the account grows tax-free as long as money remains in it, and no RMDs go into effect until after the death of the owner. So the longer you stay invested in a Roth IRA, the more tax-free growth you should be able to obtain.
Reinvesting Additional IRA Funds Into Roth IRAs
Roth IRAs are funded in two ways. One option is a direct contribution, but the IRS has capped the amount that can be directly contributed to a Roth each year. For the 2023 tax year, the maximum annual contribution is $6,500 up to age 50 and $7,500 for those 50 and older.
Fortunately, there’s another way to put money into a Roth IRA if you have too much earned income or no earned income. That’s by reinvesting funds from traditional IRAs to a Roth IRA. Converting is appealing because the funds grow tax-free, and qualified withdrawals are also tax-free. Also, your beneficiaries won’t have to pay taxes on distributions when they inherit your Roth IRA upon your passing.
It should be noted that if you have multiple retirement plans, you must account for the RMDs of each. However, it may be possible to withdraw the entire amount from a single account if you prefer.
A Roth conversion may be right for you if:
- Expect to be in the same or higher tax bracket in retirement.
- Can afford to pay the conversion taxes without dipping into the retirement funds themselves.
- Will not need the funds during retirement and want to pass them on to your beneficiaries.
Of course, a conversion is not ideal for everyone. If you have to deplete other assets to pay the conversion taxes, you may need the funds within the next five years, or are unsure about your tax status for the current year, you should consider other options. Furthermore, it is important that you consult a tax professional to assess your specific circ*mstances and advise you accordingly.
IRS Requirements for Conversions
The IRS tax code allows IRA owners to convert some or all of their accounts to Roth IRAs with one key stipulation. You cannot convert any funds until your RMD has been satisfied, as noted above.
When you reach the age requirement, the government says you have to take out a specific amount from this retirement money each year (RMD). Let’s say the total of your RMDs for the year is $60,000, but you can have $80,000 of taxable income before you move into a higher bracket.
In this case, if you want to move some of your IRA savings into a Roth IRA, you can only move $20,000 after you've already taken out the $60,000 required for your RMD. Specific numbers will vary from case to case, year to year.
The government sees RMDs as money you should pay taxes on, so you can’t directly convert it into the Roth IRA savings like you can with the other money. However, once the post-taxed RMD money hits your bank account, you are free to invest that money as you wish within the Roth IRA guidelines.
Also, the money you can convert to your Roth IRA—in this scenario, $20,000—will be added to your total gross income for that year, and you will owe income tax on the total converted amount. The amount you pay in conversion taxes depends on your tax bracket and the income tax rate for that year.
Account holders can and do withdraw more than the RMD. Depending on your retirement plan, you could technically convert $1 million from a traditional IRA to a Roth IRA if you wanted to, which would result in $1 million of reportable income on your tax return and the applicable tax paid to the government. The government loves this conversion and applies no restrictions on it because taxes must be paid the year the funds are transferred. It is important to note that this should not be interpreted as investment or tax advice. Rather, this is general information intended to inform you of potential options. It is our recommendation that you consult a tax and financial professional before implementing the strategy that is referenced.
SECURE Act Implications to Consider with Retirement Planning
The SECURE Act was originally signed into law in 2019 and updated in 2022 with provisions to encourage more Americans to save for retirement. SECURE 2.0 increased the required age for RMD distributions for all retirement plans to age to 73—and eventually to 75 in the next 10 years. Previously, RMDs went into effect after the participant or owner reached the age of 70 ½.
As of 2024, the SECURE Act also eliminates RMDs for some qualified Roth accounts—something to consider when creating your retirement plan. Ask your EP Wealth Advisor for information on these Roth plans.
Tax Consequences of a ROTH IRA Conversion
Conversions are taxable, so it’s important to work with a tax professional to determine whether the tax rate on the conversion is less than the estimated tax rate you’d pay if you took the funds out of a traditional IRA. If the taxes you’ll pay on the conversion are less than the estimated tax rate you’d pay pulling from the traditional IRA, the move may make sense.
Here’s a possible tip: if you can afford to do so, you should pay the tax on the traditional IRA disbursem*nt out of sources other than the money you’re contributing to the Roth IRA. So for example, if you convert $5,000 and owe $1,000 in taxes on that disbursem*nt, you can pay it from separate funds to ensure the full $5,000 goes to the Roth IRA rather than only $4,000. Over the long term, that will be more beneficial than simply converting the net amount.
Because the money in a Roth IRA grows tax-free, you’ll want to be very selective about spending it. From a planning perspective, it’s basically the last bucket you should tap into to facilitate your living needs in retirement.
How to Reinvest in a ROTH IRA
While converting to a Roth IRA may seem like a complex task, it doesn’t have to be with your EP Wealth Advisor here to help. We recommend making an appointment with one of our retirement planning professionals to determine if you qualify for a conversion and if it will add value to your portfolio.
If you decide to transfer funds from a traditional IRA to a Roth IRA let us handle the details. If you don’t have a Roth account, we can help you open one and complete and submit the proper account paperwork to complete the conversion. We are here to answer questions and protect your interests every step of the way.
Want to learn more about retirement planning services to ensure a bright future for you and your loved ones? Connect with an EP Wealth Financial Advisor in your area today.
