Toward the end of each year, a client probably has a good idea of what his or her adjusted gross income (AGI) and tax liability will be. Consequently, this can be the optimal time to consider and execute tax management strategies.
Often, we blog about tax deferral strategies for clients in the higher income-tax brackets. Not this time. This post is about something, of which you'll want to be aware, regarding Roth IRA conversions. Because amounts converted are included in income, paying tax on this income at a relatively low rate may make good sense. Your clients who are in the lower income-tax brackets are likely to be retired; they may even be taking required minimum distributions (RMDs).
Roth IRA conversions are executed via a rollover, trustee-to-trustee transfer, or same trustee transfer (aka internal Roth IRA conversion). Regardless of the conversion method used, the conversion is treated as a rollover.
It is important to understand that not all qualified assets can be rolled over; only eligible rollover distributions (ERDs)* can be rolled. And, since RMDs are not included in the definition of ERDs they cannot be rolled and therefore cannot be converted to a Roth IRA.
So, if clients are required to take minimum distributions, be sure that at least the RMD for the year is distributed because it cannot be converted. Converted amounts are included in income (the RMD is also)**, so you’ll want to be sure that the tax liability is included in your planning.
Of course, this post doesn't cover everything you'll need to know about RMDs, ERDs, or Roth IRA conversions. For more information, feel free to contact Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at RSG@PacificLife.com.
Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.
Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.
Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.
Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.
No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency