Vanguard leaders discuss Roth IRA conversion


What is a Roth IRA conversion? Why should I convert to a Roth? Is there a “best time” to convert? Vanguard retirement investment strategist Maria Bruno and Kahlilah Dowe, Certified Financial Planner™ professional with Vanguard Personal Advisor Services provide answers for these Roth frequently asked questions.

Notes:
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

© 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

 



TRANSCRIPT

Amy Chain: Maria, I’m going to ask you to kick us off on a question that we got in many, many forms ahead of this evening’s webcast. But this one, in particular, came from D.M. in Michigan who asks us to give some more specifics about finding a sweet spot for a conversion to a Roth IRA. So maybe first you can define what a conversion would be and then tell us what the sweet spot is.

Maria Bruno:
Okay, yes, we’re starting out of the gate with some good questions.

A conversion is, you take a distribution from a traditional IRA, that amount, the pretax balance is considered income, so it’s added to your income for that year, and it’s taxable accordingly. So, in essence, you are accelerating an income tax liability for some type of economic benefit; in the situation, it’s to convert it to a Roth IRA. And then from there, the account grows tax-free and many other benefits that we’ll talk about this evening.

So probably the big question that we get, and I’m sure Kahlilah gets this question a lot is, “Well, when should I convert to a Roth or should I convert to a Roth?” And when we think about the sweet spot, I often talk about this in the context of retirees. If you think about individuals that are still working, they can get tax diversification, and by that I mean having different account types, be it tax-deferred and Roth, by channeling their contribution. So that’s one way to achieve tax diversification.

If you’re retired, however, your options are limited. You would have to do a conversion in order to gain that tax diversification. So it’s really just understanding does this make sense, and how would I accomplish this.

The sweet spot, generally speaking, is you want to since you’re actually accelerating an income tax liability. The goal is to do that when you’re in a low tax bracket or if the account is maybe relatively lower value because the gain might be lower, and so the goal there, or the tax might be lower, the goal there would be try to minimize that tax liability.

And for retirees, one thing to consider is, you know, between those ages maybe of 60, 65 through 70 could be the sweet spot. We call this oftentimes the Roth conversion zone, and it’s a way to manage RMDs before age 70½. These are required distributions from traditional IRAs. So the thought would be is if you’re in a lower tax bracket during those years, before you start taking Social Security, for instance, consider doing a series of Roth conversions to help build that tax diversification, ultimately lower your required minimum distributions accordingly.

So I’m sure we’ll talk a lot about that this evening in terms of the trade-offs there, but when we talk about the sweet spot, that generally is one period.

Amy Chain: So the sweet spot at the highest level is when you think your tax bracket is going to be the lowest.

Maria Bruno: At the time of conversion. Your goal is to try to minimize the income tax liability that’s due on that conversion.

Important information
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

© 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.