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Anwers to Pre-Retirees 9 Biggest Worries

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Good Advice Need Not Be Complicated

Jun 17, 2016 1:26:30 PM
Author: Scott Hanson

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What are the tax advantages of opening an IRA and then immediately converting it to a Roth? Find out what Scott and Pat have to say.

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Read Full Audio Transcript:

Pat: We're gonna talk to Randy in Lakewood, Colorado. Randy, thanks for joining Hanson McClain.

Randy: Hey, guys. How are you doing?

Scott: Hi, Randy.

Pat: Good, how are you? What can we do for you?

Randy: I have a general question for you that probably doesn't need to drill down into my specifics, but I was told by a recent retiree that one strategy I should think about is taking money and opening an IRA and then immediately converting it to a Roth, so I get advantages on both ends.

Pat: So what he's talking about is making a non-deductible contribution into an IRA and then the very next day converting it to a Roth, so it grows tax-deferred, it comes out tax-free. If you qualify.

Scott:  Do you have any existing IRAs today, Randy?

Randy: I do.

Pat: Outside of your company pension plans and an IRA, existing IRA?

Randy: Yes.

Pat: How much do you have in that IRA?

Randy: I have probably about 3 or 4 that have maybe about $30,000, something like that.

Pat: You have a thrift savings plan or 401K where you work?

Randy: Thrift savings.

Pat: Were they deductible contributions into your IRA?

Randy: I no longer contribute.

Pat: I know, but you deducted them back in the day? You deducted them on your taxes?

Randy: Yes.

Pat: So what you want to do is take those existing IRAs and convert them back into your company savings plan or your thrift savings plan...

Scott: In order to get...wait, hold on, hold on.

Pat: Let me answer the question.

Scott: No, no, no. Can you contribute to a Roth IRA today or does your income preclude it?

Randy: My income's $150,000.

Scott: Are you married?

Randy: I'm married.

Scott: Okay. So if your income's $150,000 and you're married, you can contribute to a Roth IRA.

Pat: That's correct.

Randy: Correct.

Scott: So contributing to a regular IRA and then immediately converting to a Roth....

Pat: ...was a lot of work for nothing.

Scott: As a matter of fact, it wouldn't...

Pat: It would actually create a taxable event for you.

Scott: Yes. It would create a taxable event for you. Every situation's unique. The reason is because you have other IRAs. If you called and said, "I have no other IRAs. My income's $200,000. How can I get money into a Roth," we'd say, just like someone had told you, contribute to a non-deductible IRA and immediately convert it to Roth. You don't need to do that.

Pat: It wouldn't have been that...yeah, you don't want to do that. Thank you, Scott. I was gonna give him complicated answer, but the easy answer is go ahead and make a ROTH contribution. You don't have to do what your friend said.

Scott: What your friend said won't even help you. It will hurt you.

Pat: But he had the right idea, and we consider him a good friend for giving us the right idea.

Scott: But a not-so-good friend for not knowing your situation well enough.

Pat: Yes.

Randy: So you're saying it's not worth it.

Pat: No, we're saying it won't work. Your friend's wrong in your situation.

Scott: But you can make a Roth contribution that does exactly what you wanted to do without having to go through that hassle.

Pat: So you don't need to. You don't need to.

Scott: Have your friend listen to the show if he's confused on why we thought his idea wasn't the best.

Pat: But the answer to the question is, Randy, make a Roth contribution.

Scott: Because you can do so.

Pat: You can do so.

Scott: Thanks for calling, Randy. We're up against the clock, and your friend can listen to the podcast of this to hear why it doesn't make sense for you and why it does for others. As a matter of fact, for people that have higher incomes that are precluded from Roth contributions, we recommend that all the time and we do it for our Hanson McClain clients on a regular basis.


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