a $5,000 Roth or a $20,000 Roth – Which would you prefer?

Which would you prefer – a $5,000 Roth or a $20,000 Roth?  Yes, this is a real question and a real choice you can make.

As you prepare your 2011 tax returns ask your tax preparer whether you qualify to make a contribution to a Roth IRA.  If you do, why not consider doing a Roth conversion rather than a Roth contribution.   With a Roth contribution you are limited to a maximum contribution of $5,000  ($6,000 if over age 50).  Instead, you could convert $20,000 ($24,000 if over age 50) from your Traditional IRA to a Roth IRA.  This $20,000 conversion will generate taxable income, which if you are in a 25% federal tax bracket will increase your taxes by $5,000 for 2012.  However, by using the $5,000 to pay the tax on the Roth conversion rather than making a straight Roth contribution you wind up with a $20,000 Roth rather than a $5,000 Roth.  Remember that future distributions from the Roth (after you reach 59.5 years old and have had the Roth for 5 years) are tax-free.

If you do not qualify to make a Roth contribution because your Modified Adjusted Gross Income exceeds the limits you can still do the Roth conversion as there are no income limits on conversions.

If you have already filed your 2011 taxes and made a Roth contribution you have a couple of options:

  1. Leave 2011 as it is and plan to use your 2012 Roth contribution dollars to pay for a Roth conversion.
  2. You can withdraw the contribution you just made as a return of excess contribution and then do the Roth conversion. No change is necessary to your already filed return.

Bottom line:  there may be an option to shift some of your retirement assets from Traditional IRAs and their future taxation to Roth IRAs with their tax-free future distributions.

If you would like to explore whether this strategy makes sense for you please give me a call.

As Financial Advisors of McCarthy Wealth Solutions, LLC we are not qualified to render advice on tax or legal matters.  You should discuss any tax or legal matter with the appropriate professional.


Although the information included in this report has been obtained from sources we believe to be reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

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