Which Professional Do I Need for the Tax Calculation of a Roth Conversion? A CFP, Financial Advisor or Tax Preparer? (2024)

FAQs

Which Professional Do I Need for the Tax Calculation of a Roth Conversion? A CFP, Financial Advisor or Tax Preparer? ›

(A financial advisor can help you determine the relevant tax rates so you can make a wise decision on whether to do a Roth conversion.)

You'll owe income tax on the entire amount that you convert from a traditional IRA into a Roth IRA in the year you make the switch. The amount of tax will depend on your income tax bracket and income tax rate—between 10% and 37%. 1 The money you convert is added to your gross income for the tax year.

But while an accountant can suggest these strategies, a financial advisor is often needed to execute the plan, as certified public accountants, or CPAs, typically are not licensed to set up accounts like IRAs, Fletcher says.

Form 8606 is the key to reporting backdoor Roth IRAs successfully. The tax form, which is filed as part of your overall return, reports to the IRS that the Traditional IRA contribution you made to start the process of the backdoor Roth IRA was not deductible.

The other incentive financial advisors have to promote Roth IRAs is that most of them make their money via Assets Under Management (AUM). This means that their fee is paid by a percentage of the investments they manage for you. The industry norm is 1%, and in many cases, higher.

The Roth IRA five-year rule says you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to a Roth IRA account. This five-year rule applies to everyone who contributes to a Roth IRA, whether they're 59 ½ or 105 years old.

You must report any amount converted from a tradi- tional to a Roth IRA on your federal income tax return. Unless you choose otherwise, the IRS requires 10% of the conversion amount be withheld by URS for federal income tax purposes. You may elect to have no taxes withheld or elect to have more than 10% withheld.

If you're unsure whether a Roth IRA is the right option for you, consider talking to a financial advisor. An advisor can help you evaluate all of your potential options for saving for retirement and figure out what's best for your situation.

What are the main differences between a tax advisor and a CPA? Tax advisors specialize in tax law, planning, and compliance, focusing on strategies to minimize tax liabilities. CPAs offer a broader range of financial services, including auditing, financial planning, business consulting, and tax services.

Services offered. Accountants typically offer services related to tax preparation and may also be involved with financial statements or tracking and organizing transactions. Financial advisors help with retirement planning, investment management, estate planning, tax strategy and more.

Can you write off a Roth conversion? ›

Make the most of a business-related loss

Certain pass-through business owners (sole proprietors, LLC members, and S-corp business owners) may be able to apply tax losses from business operations to offset ordinary income on their personal tax returns, including income from a Roth IRA conversion.

In summary, if you have ever made after tax contributions to an IRA and you currently participate in a 401(k) plan or WRP where your employer allows the rollover of IRA funds, your situation would allow you to convert your after tax IRA contributions to a Roth completely free of federal income tax (after having rolled ...

The tax requirements for a backdoor Roth IRA involve reporting nondeductible contributions to a traditional IRA and subsequent conversions to a Roth IRA on Form 8606. Failing to do so, could cost you more money in IRS penalties and additional taxes on the converted amount.

Since a Roth conversion increases taxable income in the conversion year, drawbacks can include a higher tax bracket, more taxes on Social Security benefits, higher Medicare premiums, and lower college financial aid.

While there's no prohibition or disadvantage to a Roth conversion based on your age at 65, converting the entire $1.2 million all at once will burden you with a larger tax bill than you may want to pay in a single year.

You'll owe income tax on any money you convert. 15 For example, if you move $100,000 into a Roth 401(k) and you're in the 22% tax bracket, you'll owe $22,000 in taxes. Make sure you have the cash elsewhere to cover the tax bill, rather than using money from your 401(k) to pay it.

Bottom Line. You won't pay double taxes with a backdoor Roth, but you may end up paying some taxes depending on your financial situation. Talk with your financial advisor before making this move to minimize taxes and maximize retirement benefits.

While there's no way to avoid conversion taxes completely, you can restructure them to make this much more manageable. By staggering out your conversion or timing it for years in which you have low tax liability or portfolio losses, you can reduce the impact of a Roth IRA conversion.

Roth conversions are taxed as ordinary income; however, conversions can impact the taxability of more favorable income as well, like long-term capital gains and qualified dividends. Depending on income level, capital gains and qualified dividends can be taxed at 0, 15, 18.8, or 23.8%.