The Big No-no On Roth Conversions (avoiding the 10% penalty)

Roth conversions are a great way to move money from your taxable retirement accounts to a tax-free account.

This protects you from rising tax rates, helps you pay no taxes on your social security benefits because money coming out of Roth IRA’s is not considered “provisional income”, and is also one of the key strategies to a completely tax-free retirement.

But, you have to be careful! ⚠️

And a lot of advisors make a big mistake when executing Roth Conversions for their clients.

So when you move money from the taxable account to a tax-free account like a Roth IRA you are triggering a taxable event…

And that’s ok.

The goal is to pay taxes now (at a known rate, in a known tax bracket), so that your investments can grow free of any tax liability in the future.

So to do this effectively, you need to have money set aside to “pay the taxes” on the conversion.

But a lot of advisors recommend paying the taxes out of the conversion amount itself…

This is a big no-no, if you’re under 59–1/2.

Let’s say you convert $100,000 from your traditional IRA to a Roth IRA and you owe $20,000 in taxes.

You should pay the taxes from a non-qualified account like your savings, checking, or brokerage account.

If you instead decide to take the taxes out of the rollover amount, it’s going to be considered a “distribution” which requires a 10% penalty if you are under 59–1/2….

So the $20,000 in taxes isn’t considered a “rollover” it’s considered a distribution, and will therefore get hit with a $2000 penalty! 😲

This is something that happens a lot….

…and many advisors don’t realize this until it’s too late.

That’s why you want to be very smart and strategic when repositioning your money.

You want to make sure you do it correctly, so you aren’t paying unnecessary penalties.

Let’s chat 💬😎