Year-End Retirement Planning Strategies Around Your IRA

Dear Clients & Friends,

As we come to the end of another year, many people are turning their thoughts to their long-term financial security, looking for ways to make the most of their savings, especially when considering retirement. The good news is that there are different options available based on your circumstances. In this article, we break down the possible benefits of converting your traditional IRA to a Roth IRA. (Note: Taxpayers may convert a traditional IRA to a Roth IRA regardless of modified adjusted gross income (AGI) or filing status.)

The primary differences are as follows:

Should you convert your traditional IRA to a Roth IRA?

It could be a good idea to convert to a Roth IRA if you anticipate being in a higher tax bracket at the time of distribution, or if your investment can be expected to grow due to a long amount of time between contribution and distribution. 

There are annual limits to both traditional and Roth IRA contributions. For 2023, the maximum amount that can be contributed to either one is the lesser of your total annual compensation or $6,500, going up to $7,000 in 2024.

In order to maximize the benefit of untaxed growth of Roth IRAs without violating annual contributions limits, you can convert other retirement contributions to a Roth IRA, including traditional IRA contributions, as well as §401(k), §403(b), and §457(b) deferral amounts (subject to separate annual limitations). There is no limit on how much you can convert during a taxable year. Tax is due upon the conversion, just as it would be if it were an original Roth contribution.

Another option is to recharacterize a regular contribution made to either a Roth or traditional IRA. To do this, you need to tell the trustee of your account to transfer the amount of the contribution plus earnings to a different type of IRA in a trustee-to-trustee transfer, or to a different type of IRA with the same trustee. However, recharacterization elections can only be made if the transfer is accomplished by the filing deadline for the owner’s federal income tax return (including extensions) for the year in which the original contribution was made. Furthermore, although it was previously possible to switch back again, recharacterizing a converted Roth IRA back to a traditional one is no longer allowed.

Finally, if you are younger than 59½ and take a distribution large enough to convert the desired amount to your Roth IRA and cover the taxes due upon conversion, you will also have to pay a 10% early distribution penalty tax on any excess not directly rolled over to the Roth account. For this reason, it would be better to pay the tax due upon conversion from separate funds, instead of taking it as a distribution.

Understanding how to plan for your future is one of the best gifts you can give yourself. Making a year-end IRA contribution and/or conversion to a Roth IRA can be part of good planning. At CJBS, we understand that there are questions to answer when considering what’s best for your specific situation. As ever, we are here to offer guidance tailored to your unique circumstances and to help you plan for the long term. 

We wish you all the best for the new year and beyond!

Stay safe and healthy,

The CJBS Team

UPDATED: November 2023