Is Now the Time to Convert to a Roth IRA?

The reach of the recently enacted Tax Cuts and Jobs Act is far and deep, and even extends into the type of IRA you should consider:  regular or Roth? And if you have a regular IRA, should you convert it to a Roth IRA and when?

Keep in mind that an investment in a regular IRA (or 401k) is made with before tax dollars.  Your money grows tax deferred. When distributions are taken they are taxed as ordinary income, at the marginal tax rate in effect at the time of withdrawal.  Required minimum distributions (RMD) must generally be taken beginning when the taxpayer reaches age 70 ½.

Investments in Roth IRAs (or 401k) are generally opposite. The money you put into a Roth IRA is made with after tax dollars. The investment grows tax-free, and is generally tax-free when distributions are taken.  There are no required minimum distributions.

The Tax Cuts and Jobs Act of 2017 lowers the marginal tax rates for the majority of taxpayers. This makes the “tax hit” on Roth IRA contributions, and conversions, smaller than it may have been in the past. Generally, if the current tax rate of the investment is lower than what the rate would be when funds are removed it is beneficial, on the assumption that tax rates will be higher in the future.

This lower tax rate – however long it may last – may be sufficiently attractive for some taxpayers to convert their regular IRAs into Roth IRAs, helping to ensure tax-free withdrawals in the future. There are a number of reasons why an investment in regular or Roth is advantageous to an individual. We strongly advise that any taxpayers considering this strategy should discuss it with a qualified financial advisor. As always, we at Gray, Gray & Gray and Gray Equity Management, are ready to help you if you have questions.  Contact us at (781) 407-0300.

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