roth ira

Roth IRA Conversions

Scarsdale CPA Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

Just because you qualify to make contributions to a Roth IRA does not mean you are also entitled to convert your plain-vanilla IRA into a Roth. Unfortunately, the income limit for conversions is slightly lower – $100,000 of modified adjusted gross income for both joint filers and singles – than the income limits for contributions. However, if you qualify to convert, there are situations where you should.

Find out from Scarsdale CPA Paul Herman if a Roth IRA conversion is right for you

Converting your Roth IRA to a traditional IRA may be a good step for your retirement planning.

Besides allowing tax-free and penalty-free withdrawals of contributions, the Roth IRA enables most savers to amass a greater nest egg because withdrawals from earnings during retirement are tax-free (as long as you are over 59 1/2 and have had the account for at least five years). Should you convert? In most cases, the answer is yes. But there are some things to carefully consider before making a final decision:

Do You Have the Money to Pay the Taxes on the Conversion?

When you convert your regular IRA to a Roth, you will have to pay tax on any earnings and pretax contributions. This, in lieu of paying taxes upon later withdrawals from the Roth account. You should not withdraw from your IRA to pay the conversion tax, however. If you do so before age 59 1/2, you will generally owe a 10% penalty on that amount. Plus you will permanently give up the opportunity for tax-free Roth IRA compounding of that amount. Do not think that you can avoid the conversion tax by just rolling over an amount equal to your after-tax (nondeductible) contributions. Each dollar you roll over from a regular IRA is considered a “blended” dollar. Therefore, a percentage of the amount rolled over into the Roth account will be taxed no matter what (except in the unlikely event that your IRAs are worth less than the amount of your after-tax contributions).

Will the Rollover Disqualify You for Important Tax Benefits?

The conversion income could push you into a higher tax bracket and disqualify you from other tax benefits such as the dependent child and college tuition tax credits.

How Much Time Do You Have Until Retirement?

Generally, the older you are, the less sense it makes to convert a traditional IRA to a Roth. You’ll have less time to make up for what you lost in taxes on the conversion.

Do You Plan to Leave All of Your IRA to Your Heirs?

One case in which it makes sense for an older traditional IRA holder to transfer funds to a Roth IRA is when he or she is planning to leave the money to heirs. Why? First, unlike traditional IRAs, Roths require no minimum withdrawals during the life of the IRA owner. If the surviving spouse inherits the Roth account, he or she need not take any minimum withdrawals either. With a regular IRA, you must begin taking taxable withdrawals from that account no later than the year after you turn 70 1/2. So you lose out on the chance for that money to continue to compound without paying taxes. That can mean a lot less money for your heirs. Secondly, conversion to a Roth will reduce your taxable estate by the amount of income tax you pay to convert. This can reduce estate taxes for your heirs.

Will Your Income Tax Bracket Drop After Retirement?

The clearest case in which converting from a regular tax-deductible IRA to a Roth IRA does not make sense is when you expect to drop into a much lower income tax bracket after you retire (say, from 25% to 15%). Why? You will have to pay income tax on the conversion at your current high rate. Instead, let the money compound in your regular IRA and pay taxes at your lower rate in retirement. However, if your tax rate is only expected to drop a few points after retirement (for example, from 28% to 25%), conversion is probably still the right maneuver.

Our Westchester accounting firm is here for all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.

Roth IRAs for Kids

If you have a child who works, consider encouraging the child to use some of the earnings for Roth IRA contributions. All that is required to make a Roth IRA contribution is having some earned income for the year. Age is irrelevant. Specifically, your child can contribute the lesser of: (1) earned income or (2) $5,000.

By making Roth IRA contributions for just a few years now, your child can potentially accumulate quite a bit of money by retirement age.

Tips from Scarsdale CPA Paul Herman on Saving for Retirement

The earlier the better when it comes to starting a Roth IRA.

Realistically, however, most kids will not be willing to contribute the $5,000 annual maximum even when they have enough earnings to do so. Be satisfied if you can convince your child to contribute at least a meaningful amount each year. Remember, if you are so inclined, you can make the Roth IRA contribution for your child.

Here’s what can happen. If your 15-year-old contributes $1,000 to a Roth IRA each year for four years starting now, in 45 years when your child is 60 years old, the Roth IRA would be worth about $33,000 if it earns a 5% annual return or $114,000 if it earns an 8% return. If your child contributes $1,500 for each of the four years, after 45 years the Roth IRA would be worth about $50,000 if it earns 5% or about $171,000 if it earns 8%. If the child contributes $2,500 for each of the four years, after 45 years the Roth IRA would be worth about $84,000 if it earns 5% or a whopping $285,000 if it earns 8%. You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your child approaches retirement age.

For a child, contributing to a Roth IRA is usually a much better idea than contributing to a traditional IRA for several reasons. The child can withdraw all or part of the annual Roth contributions-without any federal income tax or penalty-to pay for college or for any other reason. (However, Roth earnings generally cannot be withdrawn tax-free before age 59 1/2.) In contrast, if your child makes deductible contributions to a traditional IRA, any subsequent withdrawals must be reported as income on his or her tax returns.

Even though a child can withdraw Roth IRA contributions without any adverse federal income tax consequences, the best strategy is to leave as much of the account balance as possible untouched until retirement age in order to accumulate a larger federal-income-tax-free sum.

What about tax deductions for traditional IRA contributions? Isn’t that an advantage compared to Roth IRAs? Good questions. There are no write-offs for Roth IRA contributions, but your child probably will not get any meaningful write-offs from contributing to a traditional IRA either. Any additional income will probably be taxed at very low rates. Unless your child has enough taxable income to owe a significant amount of tax (not very likely), the advantage of being able to deduct traditional IRA contributions is mostly or entirely worthless. Since that is the only advantage a traditional IRA has over a Roth IRA, the Roth option almost always comes out on top for kids.

By encouraging kids with earned income to make Roth IRA contributions, you’re introducing the ideas of saving money and investing for the future. Plus, there are tax advantages. It’s never too soon for children to learn about taxes and how to legally minimize or avoid them. Finally, if you can hire your child as an employee of your business, some additional tax advantages may be available.

Westchester CPA Paul Herman is here to answer all of your personal finance questions. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.


Roth IRA Contributions


Advice from a Westchester tax preparation firm on your Roth IRA

Creating a Roth IRA can help secure your financial future.

Tax preparers at Herman & Company CPA’s have all the answers to your personal finance questions!

Confused about whether you can contribute to a Roth IRA? The IRS suggests checking these simple rules:

  1. Income
    To contribute to a Roth IRA, you must have compensation (e.g., wages, salary, tips, professional fees, bonuses). Your modified adjusted gross income must be less than:

    • $176,000: Married Filing Jointly.
    • $0-$10,000: Married Filing Separately (and you lived with your spouse at any time during the year).
    • $120,000: Single, Head of Household, or Married Filing Separately (and you did not live with your spouse during the year).
  2. Age
    There is no age limitation for Roth IRA contributions. Unlike traditional IRAs, you can be any age and still qualify to contribute to a Roth IRA.
  3. Contribution Limits
    In general, if your only IRA is a Roth IRA, the maximum current year contribution limit is the lesser of your taxable compensation or $5,000 ($6,000 for those age 50 or over).The maximum contribution limit phases out if your modified adjusted gross income is within these limits:

    • $167,000-$176,000: Married Filing Jointly
    • $0-$10,000:  Married Filing Separately (and you lived with your spouse at any time during the year)
    • $105,000-$120,000: Single, Head of Household, or Married Filing Separately (and you did not live with your spouse)
  4. Contributions to Spousal Roth IRA
    You can make contributions to a Roth IRA for your spouse provided you meet the income requirements.

Our Westchester CPA firm is your one-stop shop to planning your retirement. Herman & Company, Certified Public Accountants & Consultants proudly serves businesses and individuals inWestchester County, NY, Armonk, NY, Bedford, NY, Bedford Hills, NY, Chappaqua, NY, Harrison, NY, Katonah, NY, Larchmont, NY, Mt. Kisco, NY, Rye Brook, NY, Pound Ridge, NY, Purchase, NY, Rye, NY, Scarsdale, NY, White Plains, NY and Greenwich, CT.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.