What You Should Know about Converting Savings to a Roth

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By  Bennett Whitlock,  CRPC ®

Private Wealth Advisor

NestEggIf you are like many people, the majority of the money you’ve set aside for retirement is held in your workplace savings plan, such as a 401(k) or 403(b). When the time comes to draw income from this portion of your nest egg, most or all of the distributions will likely be subject to income tax.

“Tax diversification” in retirement means having access to income sources that are subject to different tax treatment. A good tax- diversification strategy includes a “tax-free” category of assets.

You are now allowed to make a direct rollover of assets in a workplace plan to a Roth IRA. A Roth IRA enables money contributed after tax to grow and receive qualified withdrawals tax-free. You are eligible to move money from a workplace plan when you separate from service (either retire or leave the employer), or in the event of death or disability.

Depending on your retirement plan, you may also be eligible for “in-service distributions,” allowing you to roll some of your retirement savings out of a plan and into an IRA before you leave your job. As with any rollover from an employer- sponsored plan, the money must move directly from the current plan to the administrator of the new account if you want to avoid unnecessary taxes or penalties.

A number of factors go into a Roth conversion decision. For instance, before converting money to a Roth IRA, decide whether the benefit of tax-free income later in life is worth the cost of paying taxes now on the converted amount, which is required. Not all of the money needs to be converted at one time. You can choose to move just a portion out of the 401(k) and into the Roth in a given year, though higher tax rates may apply.

Bennett Whitlock, CRPC ®, is a private wealth advisor and managing director with Whitlock Wealth Management, a franchise of Ameriprise Financial Services, Inc. Learn more at WhitlockWealth.com or call 703-492-7732.


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