It is very possible that the value of your IRA portfolio is lower than what it was 2 years back. When it come to IRA distributions, this may present a silver lining. By taking IRA distributions today and converting your traditional IRA to Roth IRA, you will have to pay lesser taxes when your portfolio value is depressed.
The general concept is as follows: you move money from your traditional IRA today while the value is depressed, pay income tax on that value, and convert the funds into a Roth IRA. Later, hopefully the value of the assets increase, and you can take as many income tax-free withdrawals as you like. This, of course, assumes that the holding period rules are satisfied for the Roth IRA (age 59½ and the five-year holding period).
Opposite the case of traditional IRAs, it is not necessary for the possessor of Roth IRA to take IRA distributions at an age of 70½ years. In addition to this, the income tax assessment on your Social Security Benefits are not evaluated by using the IRA distributions obtained from Roth accounts. Unlike conventional IRAs, this can be considered as one more tax advantage that the Roth account holders get when taking IRA distributions.
Even though you have to pay your IRA tax if you convert your retirement money to the Roth, at the time of IRA distribution, this plan works well for expected future tax savings. Let's assume that a taxpayer distributes $300,000 from the conventional IRA into Roth account. Now, let's assume that the money from Roth is invested into various investment portfolios.
Over the long haul, if we suppose that the investments grow at 10% for 15 years, it should accumulate a value of $1.2 million. Even though the portfolio gains by $900,000, there is no need to pay the IRA tax later on on this gain as it is all tax free. Although your beneficiaries are required to take minimum Roth IRA withdrawals based upon their life expectancies, these distributions are tax-free.
You can get an additional benefit if you match the timing of IRA distribution with the year when you fall in the lower tax bracket. Say for instance you've been getting a pension from 60 to 70 years of age. At the age of 71, you have lower income and a lower tax bracket when your pension payment cease. Because of the lower tax bracket, the IRA distribution is greatly affordable at such a time.
Keep in mind that your conversion of a traditional IRA to a Roth IRA does not need to be done all at once. For example, this stocks in your traditional IRA may be depressed while the bonds have held their value or even appreciated. You are free to distribute just the stocks from your traditional IRA, pay the income tax on that current value, and move those stocks into a Roth IRA for hopeful future appreciation.
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