Could Converting to a Roth IRA Be Right for You?

TRADITIONAL VS ROTH IRA

While there are several key differences between traditional and Roth individual retirement accounts (IRAs), including eligibility requirements and accessibility of funds contributed, the biggest difference is the tax treatment of distributions. In a traditional IRA, the individual receives an immediate tax advantage as contributions are deductible in the year in which they are made and future withdrawals are considered taxable income. With a Roth IRA, the individual contributes post-tax dollars and the assets and withdrawals, including investment income, are generally exempt from federal and state income tax.

WHAT IS A ROTH IRA CONVERSION AND WHO IS ELIGIBLE?

In a Roth IRA conversion, an individual withdraws assets from their traditional IRA or qualified retirement plan (QRP) and deposits the funds into a Roth IRA. The conversion, as with other distributions, triggers an immediate tax liability that is taxed as ordinary income. The amount subject to tax is generally the value of the assets on the day of the conversion. However, if the account owner was not able to take a deduction for all or a part of the funds contributed to the traditional IRA or QRP, the calculation is more complex and should be discussed with your advisor. A Roth IRA conversion can be staged over multiple years in order to stagger the tax liability.

Anyone with a traditional IRA or QRP is eligible to make a conversion, even if the individual would be precluded from contributing to a Roth IRA. Even individuals who are under the age of 59 ½, who generally pay a 10 per cent penalty on receipt of a taxable distribution from their traditional IRA or QRP, can convert to a Roth IRA without incurring a penalty (see below Important Cautions regarding time requirements).

WHO SHOULD CONSIDER A ROTH IRA CONVERSION?

Individuals who:

• Expect that income from retirement plan distributions will be subject to higher tax rates in future years – either during retirement or in the hands of an inheritor (if the named beneficiary of the account is a trust, tax is paid at the highest rates with just $12,500 in income, and if the named beneficiary is an individual, they may receive income during their peak earning years). Anyone considering naming a trust as a beneficiary for a retirement account should seek professional advice to ensure that the trust is properly structured to achieve the desired outcome.
• Want to maximize their estate for heirs, since Roth IRAs are not subject to lifetime required minimum distributions (RMDs) and thus the assets can build additional value by compounding in a tax-favored vehicle. Note that, as with traditional IRAs and QRPs, the Roth IRA is included in the account owner’s taxable estate and, after the account owner’s death, there are RMD requirements that apply to beneficiaries.
• Have portfolios that have declined in value, therefore presenting an opportunity to pay less tax on a Roth IRA conversion compared to when stock prices are high.
• Have other losses or deductions to offset the tax due on the conversion.
• Have little to no tax diversification of retirement accounts.
• Want to benefit from having less taxable income in retirement years, such as reduced Medicare B premiums.
• Have taxable estates and do not want their estates to pay tax on deferred income within their traditional IRA or QRP. Paying the income tax at the time of conversion also reduces assets that would otherwise be subject to estate tax.

WHEN DOES CONVERSION MAKE LESS SENSE?

Individuals who:

• Expect that income from retirement plan distributions will be subject to lower tax rates in retirement or after death.
• Plan to give a substantial amount of the retirement plan assets to charity.
• Are nearing or in retirement and need access to the assets.
• Are currently receiving social security or Medicare benefits.
• Have college-age children that will be applying for financial aid.
• Do not have funds outside of the retirement account to pay the income tax that will be triggered by the conversion, especially if they are under age 59½.
• May be pushed into a higher income tax bracket by the income from the Roth IRA conversion, in which case doing the conversion over multiple years could be considered.

IMPORTANT CAUTION

Though distributions from the Roth IRA are generally exempt from federal and state income tax, there are times when taxes or penalties may be imposed. Every situation is different and we would encourage anyone considering a Roth conversion to review their situation carefully with their advisors.

All right, title and interest in and to these materials are the sole and exclusive property of Cresset Capital Management, LLC, and its affiliates (collectively, “Cresset”).The information contained in these materials is not intended to provide professional, investment, legal or tax advice and should not be relied upon in that regard. The contents of these materials are for general information only and are not provided with regard to your specific investment objectives, financial situation, tax exposure or particular needs. The contents hereof are not a recommendation of, or solicitation for, the subscription, purchase or sale of any security, including the fund(s) and/or investment products mentioned herein. Nothing contained herein should be used as the basis for making any specific investment, business or commercial decision. You should carefully read the final prospectus, offering memorandum, organizational agreement and/or other supplemental and controlling documents before making an investment decision regarding any particular security carefully before investing in any security.Investments, including interests in real estate and private equity funds, are subject to investment, tax, regulatory, market, macro-economic and other risks, including loss of the principal amount invested. Investment denominated in a foreign currency are subject to factors including but not limited to changes in exchange rates that may have an adverse effect on the value of the investment. Past performance as well as any projection or forecast used or discussed in these materials are not indicative of future or likely performance of any investment product. Statements may be forward looking and are not intended as specific investment advice or guarantees of future performance. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such statements.The contents of these materials are subject to change and may be modified, deleted or replaced at any time in Cresset’s sole discretion. In particular, Cresset assumes no responsibility for, nor make any representations, endorsements, or warranties whatsoever in relation to the timeliness, accuracy and completeness of any content contained in these materials. While care has been taken in preparing the contents of these materials, such contents are provided to you “as is” and “as available” without warranty of any kind either express or implied. In particular, no warranty regarding suitability, accuracy, or fitness for a particular purpose is given in conjunction with such contents. Cresset shall not be liable for any loss, damage, costs, charges and/or expenses incurred as a result of or in connection with these materials or any reliance on the contents of these materials.The provision of any services or products provided by Cresset and/or its affiliates shall be expressly subject to the particular terms and conditions as contained in a separate written agreement with Cresset and/or its affiliate, as applicable. Cresset will not provide any individualized advice or consulting unless agreed to by a separate written agreement.  Cresset Asset Management, LLC, provides investment advisory, family office, and other services to individuals, families, and institutional clients. Cresset Partners, LLC, provides investment advisory services strictly to investment vehicles investing in private equity, real estate and other investment opportunities. Cresset Asset Management, LLC, and Cresset Partners, LLC, are SEC registered investment advisors.