Roth IRA Conversions: What You Need to Know

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Saving for retirement is a key part of any successful personal finance strategy, but there are a variety of ways to do so. From employer plans and pensions to individual retirement options, it’s important to understand your choices.

What is a Roth IRA Conversion?

If you’ve been saving for retirement through a 401(k), Traditional IRA, or SEP-IRA, and would prefer to make tax-free withdrawals during retirement, you may want to consider converting some of your retirement funds into a Roth IRA. A Roth IRA differs from a Traditional IRA in that you contribute after-tax dollars instead of pre-tax dollars. This shifts the payment of taxes on your retirement savings up front instead of at the time of withdrawal. The potential benefit of funding retirement savings with after-tax dollars is that the funds and their growth are tax free when you take your retirement withdrawals.   

When you open your Roth IRA and transfer funds from a non-Roth IRA into it, you’ll owe taxes on the money you convert. However, the money will accumulate tax-free, and you will not owe taxes when you take retirement withdrawals in later years. If you anticipate moving to a higher tax bracket in future years, you may opt to pay taxes on your current funds now rather than paying at a higher rate later.

What Accounts Can I Convert to a Roth IRA?

You can convert any existing IRA to a Roth IRA. This includes:

  • Traditional IRAs
  • Simplified Employee Pension (SEP) IRAs
  • Savings Incentive Match Plan for Employees (SIMPLE) IRAs

You can also convert employer-based retirement plans such as 401(k) plans to a Roth IRA through a rollover option. Additionally, your 401(k) plan might provide the option to convert funds within your 401(k) to a Roth 401(k).  Before considering rolling funds out of an existing 401(k) plan, it is important to familiarize yourself with any tax consequences and plan withdrawal terms.

Roth IRA Rules to Know

Conversion and Contribution Limits

Individuals can contribute $7,000 directly to a Roth IRA account in 2024 — $8,000 if the investor is age 50 or older. However, there is no limit on the amount one can convert from a tax-deferred retirement plan to a Roth IRA within a given year. This means it’s possible to convert all retirement funds at once, but for tax reasons, not everyone chooses to do this.

The Five-Year Rule

Time Horizon is an important consideration when converting to a Roth IRA. When funds are converted to a Roth IRA, they are subject to a five-year waiting period before they can be distributed. For this reason, a retirement investor should not roll over funds needed within five years or less. Ideally, funds in a Roth IRA should remain untouched for as long as possible to allow their tax-free earnings to grow.

It’s also important to remember that while you can convert pre-tax funds into a Roth IRA, you cannot “reverse” the decision and revert those funds into a traditional plan. In short, a Roth IRA conversion is permanent.

Tax Implications

As mentioned above, while converting all tax-deferred contributions to a Roth IRA is possible, it may not be feasible or wise for every retirement investor. Converting a large sum of money into an after-tax account could push the investor into a higher tax bracket for the given year.

A retirement investor cannot avoid paying Roth IRA conversion taxes completely, but the investor may be able to minimize the tax burden by converting funds over several tax years. Alternatively, the investor could opt to convert during a year when income is lower.

Before making the conversion from a traditional retirement plan to a Roth IRA, talk to a trusted financial advisor. They’ll be able to help you decide which options are right for you and potentially help minimize your tax burden along the way.

How to Convert to a Roth IRA

Although converting retirement funds to a Roth IRA is a relatively simple process, it is important to consider all options prior to making a conversion. For example, depending on the amount already accrued in a traditional retirement account, an investor may be facing a substantial tax bill upon the rollover, so this option is not for everyone.

1.   Traditional IRA or employer retirement plan.

If considering a Roth IRA conversion with funds already in a traditional tax-deferred retirement plan, those assets could be used to fund the Roth IRA conversion.

2.   Open a Roth IRA.

A Roth IRA can be opened at financial institutions, such as a bank or brokerage firm.

3.   Withdraw and deposit funds into a Roth IRA.

 There are several options for conversions:

  • A direct rollover allows an investor to transfer funds from a defined contribution plan to a Roth IRA. This is a common option for those who are leaving their current job or have left money in a retirement account from a past employer. This option requires contacting the administrator of the retirement plan and having them send funds directly to the new Roth IRA.
  • A trustee transfer allows retirement assets to be transferred directly from one financial institution or account to another. If the Roth IRA is at the same financial institution as the current tax-deferred retirement account, this is called a same-trustee transfer. If the Roth IRA is at a different financial institution, it’s called a trustee-to-trustee transfer.
  • A 60-day rollover allows the funds from the current tax-deferred retirement account to be paid directly to the retirement investor. The retirement investor must deposit those funds into the new Roth IRA within 60 days for it to qualify as a Roth conversion.

When choosing a 60-day rollover, the retirement investor must be aware that any money not deposited by the deadline will become taxable income. In addition, the retirement investor could also face a 10% early distribution tax penalty if the investor is under age 59.5. For these reasons, most individuals opt for one of the first two methods when converting to a Roth IRA.

Make Sense of Your Retirement Funds with Marietta

If you’re unsure of how to maximize your retirement plans and improve your financial situation during your retirement years, Marietta Wealth can help. Our experienced advisors know that a sound financial plan can provide confidence and improve security during your working and retirement years.

From planning well for retirement to handling life’s unexpected events, our financial planning services can help you reach your goals and build wealth for the future. Reach out to a Marietta advisor today to get started.

Marietta Wealth is a registered investment adviser.  Registration of an investment adviser does not imply any level of skill or training.  For additional information about Marietta Wealth’s financial planning and advisory services, please see the Marietta Wealth Disclosure Brochure or ADV Part 2A for full details, which is available upon request or by visiting our website. 

Certain of our representatives are Certified Public Accountants with the accounting firm Ben H. Crowe, C.P.A., LLC which is affiliated with Marietta Wealth Management. To the extent that these representatives provide accounting services, which may include tax advice, to any clients, including our advisory clients, all such services shall be performed by those representatives, in their individual professional capacities, independent of our advisory firm, for which services we shall not receive any portion of the fees charged by the representative, referral or otherwise. It is expected that these representatives, solely incidental to their practices as accountants, recommend our advisory services to certain of their clients. No client of Marietta Wealth Management is under any obligation to use the accounting services of these representatives. Our Chief Compliance Officer remains available to address any questions that a client or prospective client may have regarding this potential conflict of interest.

This article is not intended to be used, and should not be used, as the sole basis for legal advice.  The reader should seek and rely upon the guidance and advice of legal counsel before making decisions regarding any estate planning tools or documents.

3 Personal Finance Tips Everyone Should Know

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Managing money well is a skill — and often, we learn from our own mistakes and financial missteps. But there are a few tools that can help all of us avoid pitfalls when it comes to saving, investing, budgeting, and paying off debt.

Here’s the good news: you don’t need to inherit a large sum of money or get a big pay raise to enhance your personal finance strategy. These three simple tips will help you create a brighter financial future no matter how much you have in the bank today.

1. Stick to a Budget

This may seem like an obvious point, but while many people create budgets, fewer actually stay within their limits. To create an effective personal budget, keep your figures realistic and don’t overcomplicate things.

Work with an accurate picture of your finances as they are instead of creating a budget for how you’d like to spend your money differently in the future. Here’s how to build a budget you’ll actually stick to.

Calculate your monthly income and expenses.

Before you can create a budget, you need to know what you’re bringing in — and what’s going out. Gather an accurate picture of your finances, then look more closely to see what needs to be changed in order to help you meet your goals.

The great thing about budgets is that they’re designed to change along with you! For example, if you want to eliminate credit card debt, consider lowering your entertainment budget and dining out less until you reach that goal. Then, you can re-evaluate your budget again.

If you get a raise or change jobs, you can adjust your budget according to those new income figures.

Create a plan for debt payoff, saving, and investing.

Once you’ve calculated your monthly living expenses, you can designate a certain amount or percentage of your income to long-term financial goals like getting out of debt, saving a down payment for a new home, or contributing to your retirement.

Paying Off Debt

There are several ways to approach debt payoff. One method, known as the “debt snowball,” allows you to pay off your smallest debt first, eliminating one payment and helping you “roll” more money into the next largest debt until they’re all paid off.

In the “debt avalanche” approach, you pay off the debt with the highest interest rate first. Some people also find it helpful to consolidate debt by acquiring a personal loan with a lower interest rate and using it to pay off higher interest balances.

Saving

As you consider your savings goals, gather them into four buckets. First, consider building an emergency fund (typically a few months’ worth of income) to secure your ability to pay your bills if unexpected circumstances arise.

Next, consider your retirement plan. If your company has set up a retirement plan for you, find out if they offer matching contributions and determine how much you want to deposit. If you don’t have a plan through your job, open one on your own — it’s never too early!

Lastly, set short and long-term saving goals for things like family vacations, buying a home or car, or contributing to your child’s college education.

Investing

Regardless of the amount you have available in your budget for investing, talk to an investment advisor about how you can put that money to work for you. Even small investments have the potential to add up over time.

2. Schedule Regular Finance Check-Ins

To keep your personal finances healthy, ditch the “set it and forget it” mindset. Your financial picture is ever-evolving, so make sure to check in regularly. Creating a financial calendar will help you keep track of deadlines and goals! Here are some important things to include:

Quarterly tax deadlines

If you pay taxes quarterly, mark each due date on your financial calendar to stay on top of payments and avoid potential fees or penalties.

Credit reports

It’s a good idea to check your credit reports from the three main credit bureaus (Equifax, Experian, and Transunion) at least once a year. To keep a closer watch on your credit, some advisors suggest checking your credit every four months, alternating bureaus to avoid paying for reports.

Interest rates

There are several aspects of your finances that benefit from yearly checks. At least once a year, check interest rates to see if refinancing your mortgage could benefit you. Refinancing is not always the best option, but it’s worth a look.

You should also meet with your financial advisor annually. They can help you with the tasks above, along with providing a snapshot of your financial situation and offering advice on how to build wealth.

3. Set Money Goals

All of us have financial goals. In order to meet them, it’s important to attach numbers and dates to those dreams. By creating a tangible goal, you can calculate a plan to reach it. Whether you’re calculating when you’ll be ready to retire or saving up for your first home or a milestone vacation, creating a plan will help you make progress.

If you have trouble saving for your goals, consider separating your savings from your everyday spending in a more meaningful way. If your savings and checking account are at the same bank, you might find it too easy to transfer money away from your savings goals. Consider opening a high-yield savings account through another institution, and automate your deposits into that account.

Creating a Brighter Financial Future

No matter what your financial situation is today, you can forge a path toward building wealth and creating financial freedom. At Marietta Wealth, our financial planners are personal finance experts who have your best interests in mind.

As a fee-only fiduciary, our team is committed to helping you reach your financial goals and pursue your dreams, whatever they may be. Reach out to us today to schedule your first meeting.

How Do I Calculate the Value of My Personal Assets?

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Regardless of age, life stage, or any other demographic, most of us want the same thing: to reduce stress around money and experience the financial freedom to pursue our dreams. In order to do so, you should come up with an actionable plan.

In your research, you may have heard terms like asset management and risk mitigation. This terminology is important, but it can potentially overwhelm you if you’re unsure of where to start.

Saving and investing takes planning, but it doesn’t have to be complicated – and there’s a first step you should take. Before you can successfully implement a personal finance strategy that helps you reach your goals, you should calculate your own net worth to get a clear picture of where you stand.

What is Net Worth?

If you’ve ever wondered, “How do I calculate my net worth?”, you’re in the right place. Net worth is calculated using a simple formula. First, add up everything you own – these are your assets. Then, subtract everything you owe – these are your liabilities.

Even though many of us have been out of school for a long time, a net worth calculation serves as a kind of report card. It is an indicator of your current financial situation, showing you which areas of your finances are receiving a passing grade and which areas need tutoring.

Calculating Your Personal Assets

To calculate your net worth, begin by determining the value of your personal assets. For most people, assets include many of the following categories.

Real Estate

If you own a home, try to come up with a figure based on its current market value, not your purchase value – especially if you have owned it for a significant amount of time. Homes can increase or decrease in value. Typically, they are an appreciating asset. If you personally own additional properties, calculate the market value for those as well.

Vehicles

While vehicles tend to lose value over time, making them depreciating assets, they still have the potential to add value to your asset list. Include any cars you own, and don’t forget to add RVs, boats, motorcycles, or other vehicles.

Valuables

From heirloom jewelry, artwork, or prized collections to household items, the contents of your home can add up to more than you think. While it is not realistic to value all the items in your entire house, make sure to include significant purchases like furniture, electronics, and silverware or jewelry.

Retirement Accounts

If you have any kind of IRA or 401(k) from your employer (or if you opened one yourself!), add the current balances to your asset list.

Other Investments

In addition to your retirement plan, you may have other investment accounts that include stocks, bonds, or mutual funds. Check those balances and add them to your asset list.

Other Funds

Don’t forget to factor in the most recent statements from your bank accounts, both checking and savings. Add in any cash you have outside of your bank accounts, too!

Calculating Your Personal Liabilities

Once you’ve totaled your assets, it’s time to subtract your liabilities. These can vary greatly by person, but they typically include the following two categories.

Mortgages

If you financed the purchase of your home, the outstanding balance of your loan will be on your liabilities list.

Loans

In addition to mortgages, there are other kinds of loans that create liabilities.  The most common are auto loans, student loans, or personal loans.  The outstanding balances of these loans should be added to your liabilities list. 

Other Debt

Other types of debt include credit card debt, lines of credit, liens and medical debt.  These forms of debt may revolve depending on your use of them or change depending on your circumstances.  The current balances of these forms of debt would also be added to your liabilities to determine your “net” worth. 

How to Increase Your Net Worth

Once you’ve calculated your current net worth, you’ll probably want to look for ways to increase it over time. Increasing your assets and minimizing your liabilities can help your net worth grow and potentially leave it to a future generation. The following are potential ways to increase your net worth.

Reduce spending

As you add up your expenses, you may find areas you want to trim back costs. Creating and sticking to a budget can help you find savings in places you never thought to look previously.

Pay off liabilities

Eliminating loans and debt can improve your personal net worth over time. Using your budget, you can make a plan to pay off student loans, credit card debt, or other liabilities.

Build equity

Investing in an appreciating asset like a home can help you build your net worth over time. Even though you’ll likely be taking out a home loan, you’ll gain a potentially appreciating asset.

Increase investing

It’s never too early in life or too little to invest, and a good investment strategy can build your assets over time. If you have positive cash flow but aren’t sure where to begin, talk to a financial advisor about your investment options.

At Marietta Wealth, we are here to help you create an investment plan that’s tailored to your needs and goals.

Finding a Financial Partner

When it comes to personal financial planning, it’s important to find a partner you can trust. Marietta Wealth is an investment adviser to our clients, always working in your best interest to help you create the financial future you desire most.

If you need help calculating your personal net worth or creating a plan that helps you build it over time, give us a call. Our advisors would love to begin the journey with you.

Marietta Wealth is a registered investment adviser.  Registration of an investment adviser does not imply any level of skill or training.  For additional information about Marietta Wealth’s financial planning and advisory services, please see the Marietta Wealth Disclosure Brochure or ADV Part 2A for full details, which is available upon request or by visiting our website. 

Certain of our representatives are Certified Public Accountants with the accounting firm Ben H. Crowe, C.P.A., LLC which is affiliated with Marietta Wealth Management. To the extent that these representatives provide accounting services, which may include tax advice, to any clients, including our advisory clients, all such services shall be performed by those representatives, in their individual professional capacities, independent of our advisory firm, for which services we shall not receive any portion of the fees charged by the representative, referral or otherwise. It is expected that these representatives, solely incidental to their practices as accountants, recommend our advisory services to certain of their clients. No client of Marietta Wealth Management is under any obligation to use the accounting services of these representatives. Our Chief Compliance Officer remains available to address any questions that a client or prospective client may have regarding this potential conflict of interest.

This article is not intended to be used, and should not be used, as the sole basis for legal advice.  The reader should seek and rely upon the guidance and advice of legal counsel before making decisions regarding any estate planning tools or documents.

3 Keys to Creating a Personal Finance Strategy

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It’s good to have a plan. Contractors follow a building plan, medical students follow a strict academic schedule, and wedding planners think through every last detail of their clients’ big day.

This principle rings just as true for personal finance—a plan puts your money to work and helps you create the future you’ve always envisioned. These three keys will assist you in creating a financial plan that fits your needs and helps you reach your goals.

1. Assess your current financial situation.

Before you can plan for the future, you need to evaluate where you stand today. More than likely, you’re not quite where you want to be in certain financial areas—however, an honest assessment is the first step toward making positive changes.

Once you have a clear picture of where you are financially, you can make choices that get you where you’d like to be. Instead of investing, saving, or paying off debt without a strategy, you can find a way to maximize those efforts over time.

2. Set clear financial goals.

Instead of thinking about having a certain amount of money as your end goal, consider what you want your money to do for you. This allows you to create an intentional strategy for retirement, purchasing a home, paying for your child’s college education, or becoming debt-free.

Consider both long-term and short-term goals in your plan. For example, saving for retirement is a decades-long strategy for almost everyone. Meanwhile, you may want to eliminate credit card debt in a year or two, save for an international vacation, or build up enough for a down payment in five years. You can absolutely work toward multiple goals at once!

3. Create an actionable plan.

Now that you have an accurate picture of your situation and a list of financial goals you’d like to accomplish in the years ahead, you can build a step-by-step plan for a brighter future for yourself and your loved ones.

Your plan should be specific and prioritized by the goals you want to accomplish first.  Successful personal finance plan includes at least four action items.

     I.         Stick to a budget.

Budgeting may not be the most exciting part of financial planning, but it’s an essential part of the process. There are many ways to budget, but each has the same goal: to help you spend less than you earn, which provides the bandwidth you need to save and invest.

Your budget can be tailored to your needs, but if you need a place to begin, consider these common line items:

  • Rent or mortgage payments
  • Utilities and monthly bills
  • Groceries and dining
  • Subscriptions and memberships
  • Gas and vehicle expenses
  • Shopping and entertainment
  • Debt repayments

   II.         Build your savings.

When it comes to saving, many people think about the golden years of retirement – but there are other important ways to save that can benefit you long before you stop working. A great savings plan has a multi-pronged approach.

  • Long-term savings, like IRA or 401(k) contributions, can be automated so you’re effortlessly contributing to your future year after year.
  • Medium-term savings, like contributing to your child’s 529 plan or saving for a down payment, can become line items in your budget until you reach your goal.
  • Short-term savings, like emergency funds, may not need your active contribution every month, but it’s important to build this account to protect you from those unexpected costs that pop up for everyone from time to time. Once you reach your desired balance, you can pivot to a new strategy (until it’s time to replenish).

 III.         Start investing.

It’s never too soon – or too late! – to begin investing. Investments are one of the primary ways individuals build wealth and put their dollars to work for them. Even if you only have a small amount to designate toward an investment portfolio each month, it’s a worthwhile endeavor.

Knowing when, where, and how much to invest can be overwhelming. A trusted investment management professional can help you navigate the complexities of the market and create a strategy that works with your goals and risk tolerance.

 IV.         Prepare for the future.

If you haven’t taken the time to calculate when you’re ready to retire, there’s no day like today. Determining your retirement plan is a huge part of your overall saving and investment strategy. Retirement planning is just one way to prepare for the years ahead. You may want to consider creating an estate plan, writing a will, or establishing a trust  to set your loved ones up for a secure financial future after you’re gone.

A Partner in Personal Finance

If you’re looking for a trusted partner to help you navigate your personal finances, Marietta Wealth is here to help. As a fiduciary to our clients, we’re dedicated to putting your needs first in financial planning, retirement planning, and investment management.

Give us a call today and learn how we can become your personal finance partner for life.

Marietta Wealth is a registered investment adviser.  Registration of an investment adviser does not imply any level of skill or training.  For additional information about Marietta Wealth’s financial planning and advisory services, please see the Marietta Wealth Disclosure Brochure or ADV Part 2A for full details, which is available upon request or by visiting our website. 

Certain of our representatives are Certified Public Accountants with the accounting firm Ben H. Crowe, C.P.A., LLC which is affiliated with Marietta Wealth Management. To the extent that these representatives provide accounting services, which may include tax advice, to any clients, including our advisory clients, all such services shall be performed by those representatives, in their individual professional capacities, independent of our advisory firm, for which services we shall not receive any portion of the fees charged by the representative, referral or otherwise. It is expected that these representatives, solely incidental to their practices as accountants, recommend our advisory services to certain of their clients. No client of Marietta Wealth Management is under any obligation to use the accounting services of these representatives. Our Chief Compliance Officer remains available to address any questions that a client or prospective client may have regarding this potential conflict of interest.