Roth IRA conversions may be less beneficial under OBBBA, and careful planning is essential before converting previously untaxed retirement funds. Below are several common Roth IRA conversion tax traps that can cost taxpayers more than they save:

  • If a taxpayer needs to access the converted Roth-IRA funds within 5 years from a previously untaxed retirement account, such as a 401(k), 403(b), IRA, etc., penalties and taxes may apply.
  • Taxpayers considering a Roth conversion should ideally have non-retirement funds available to pay the related income taxes. Using retirement assets to pay the taxes reduces the amount that can continue to grow tax-free inside the Roth IRA.
  • If using funds from a traditional IRA to pay income taxes on the converted amount before 59½, the amount withdrawn may be subject to a 10% early withdrawal penalty.
  • Roth IRA conversions can put a taxpayer into a higher income tax bracket. It is a good idea to have a CPA run detailed projections, including expected income from all sources for the year of conversion. It may be better to wait until you are in a lower tax bracket year or spread the conversion over several years.
  • Once Required Minimum Distributions (RMDs) begin from traditional retirement accounts, conversions can create massive immediate income tax liability without solving the long-term issue of high taxable income in retirement.
  • Roth IRA conversions after age 70 require additional caution for several reasons, including;
    • Significant tax exposure
    • Medicare Premium Surcharges
    • Taxation of your Social Security benefits
    •  Shorter horizon for long-term growth
  • SALT Deduction Cap Trap – A large conversion can phase out the temporary $40,400 deduction. Modified Adjusted Gross Income (MAG) between $500,000 and $600,000, married filing joint (MFJ), requires special attention to maximize the benefit properly.
  • Senior Deduction Phase-out – The additional senior deduction of $6,000/$12,000 phases out for MAGI over $75,000 single & $150,000 MFJ. Converting in this range increases the tax rate on the converted amount.

At Killingsworth Spencer in Roswell, GA, we are dedicated to helping taxpayers in North Atlanta determine the best options for their particular circumstances. For more information on any tax matter or to schedule an appointment, please call us at 770-552-8286. Visit us at www.killingsworthspencerllc.com

Disclaimer: This post is for general information only and should not be taken as legal or financial advice.