The Tax Cuts and Jobs Act that went into effect on Jan. 1, 2018 is set to expire at the end of 2025. Concerned that their income tax rates may soon increase, many people are wondering if now is the time to convert some or all of their traditional IRA funds to a Roth IRA.

Individual Retirement Arrangements (IRAs, also known as Individual Retirement Accounts) allow people to build savings through contributions to investment accounts from which they take distributions later. Traditional IRAs may allow taxpayers to make tax-deductible contributions. Distributions, including contributions as well as tax-deferred earnings, may be subject to income tax when withdrawn.

With Roth IRAs, contributions are made with after-tax dollars and earnings are tax free, provided that withdrawal of earnings meets certain requirements. Unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs), so the funds in a Roth IRA can be allowed to compound and grow potentially for decades. That makes a Roth IRA a great vehicle for passing along an inheritance.

When converting from a traditional IRA to a Roth IRA, there is no limit to the amount or the number of times you can convert. Since each withdrawal from the traditional IRA may be subject to income tax, deciding when and how much to convert requires careful planning.

• The amount withdrawn from a traditional IRA may be taxable income, so a conversion might move you into a higher tax bracket for the year
• Doing multiple conversions of smaller amounts over a few years may avoid changing your tax bracket
• Converting before a potential tax rate increase will help mitigate tax impacts

There are several other advantages to converting to a Roth IRA:

• Having tax-free funds available gives you more options
  • When tax rates are higher, income can be taken from a Roth account
  • When tax rates are lower, income can be taken from a traditional IRA
• Lowering the balance in a traditional IRA will lower future RMDs, resulting in a lower tax bill from those distributions

Advice from Qualified Professionals Is Your Best Investment

Making decisions about your long-term financial future when regulations are subject to change in the short term is complicated. Roth IRAs are subject to some rules that may trigger penalties if not properly understood. Consulting with an experienced tax advisor is the wisest course of action to maximize your savings while minimizing your tax burden.

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Donna Urian, CPA, MST, Fischer Cunnane Director of Taxation, provides tax-efficient strategies and resolves complex tax situations for individuals, CFOs, corporate tax managers, business owners, and executives in publicly traded and privately held companies. Contact her at durian@fc.cpa or 610-431-1003.