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? ›

An advisor who does tax planning helps you optimize your taxes going forward. This is where estimating income before the end of the year so it's actionable information for Roth conversion planning is important. This is a different service than tax preparation.

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.

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.

Eligibility. Anyone is eligible to convert regardless of their income or tax filing status. To discuss the potential advantages of Roth IRAs and Roth IRA conversions with a Wells Fargo retirement professional, call 1-877-493-4727. To determine whether a Roth IRA conversion is right for you, talk to your tax advisor.

Answer: Many fee-only financial planners work with tax professionals such as certified public accountants — CPAs — to craft Roth conversion plans that can reduce future taxes. If you want an all-in-one pro, though, you could consider hiring a CPA who is a personal financial specialist, or PFS.

I did a Roth conversion this year and was told I need to pay estimated taxes. How/where do I do this? For federal taxes, you can use the IRS Direct Pay system here: https://www.irs.gov/payments/direct-pay. This method doesn't require you to create an account.

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.

You'll get a Form 1099-R the year you make the conversion. Contributing directly to a Roth IRA is restricted if your income is beyond certain limits, but there are no income limits for conversions. Your 1099-R will say code 2 in box 7 (or code 7 if your age is over 59 ½) .

Taxes aren't due until the tax deadline of the following year, so you may have more than 15 months to pay the taxes on your converted balances. (Note: If you pay estimated taxes, you may need to make some payments sooner.)

Use Form 8606 to report: Nondeductible contributions you made to traditional IRAs. Distributions from traditional, SEP, or SIMPLE IRAs, if you have ever made nondeductible contributions to traditional IRAs. Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs.

What is the downside of Roth conversion? ›

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.

However, there are no limits on conversions. A taxpayer with a pre-tax IRA can convert any amount of funds in a year to a Roth IRA. Roth IRAs also are exempt from required minimum distributions (RMDs). These mandatory withdrawals from retirement accounts begin at age 72 and can create a tax burden on affluent retirees.

Converting to a Roth IRA is easier than ever. You can transfer some or all of your existing traditional IRA or employer-sponsored retirement account balance to a Roth IRA, regardless of your income. Once the conversion is complete, congratulate yourself. You've just signed on for years of tax-free growth.

The role of both professionals is complementary, but they serve different functions. A tax advisor helps manage your tax obligations, while a financial advisor helps create long-term financial strategies that fit your lifestyle.

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.

Even when you're close to retirement or already in retirement, opening this special retirement savings vehicle can still make sense under some circ*mstances. There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one.

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.

Ideally, a nondeductible (after-tax) traditional IRA that gets converted into a Roth IRA would not be subject to any taxes, so the funds would not be taxed twice. To be clear, no converted funds would get double-taxed, but some circ*mstances can result in a taxable transaction.

Basis means money you've paid taxes on already. It's not that common, but if you've made non-deductible contributions to a tax-deferred retirement account and you later decide to convert some of that money to a Roth IRA, you won't have to pay taxes on your basis.

First, add up all the contributions you've made to your Roth IRA since opening the account. Then, subtract any prior withdrawals of your contributions you've made. This represents the portion of your account that can be withdrawn tax-free at any time.