Down markets offer a good time to move your money out of those tax-deferred accounts and into something that won’t be taxed when you retire. Sure, you’ll pay taxes as you make that conversion, but there’s a good reason to pay the taxes now rather than later.
Here are a few things to keep in mind when it comes to a Roth conversion:
Consider the amount you convert to a Roth during one tax year.
You may not want to convert all of your tax-deferred savings into a Roth during a single tax year. This could potentially put you in a higher income tax bracket. It’s important to understand the tax bracket you’re in and how much room exists until you reach the next tax bracket.
Understand there are no income limitations.
Currently, income limits exist for opening and/or contributing to a Roth IRA directly. However, there are not income limits when it comes to converting funds from a Traditional IRA into a Roth IRA. Sometimes this is called a “backdoor contribution”.
Know you can convert at any age.
Under certain circumstances, there is a 10% penalty to convert funds from a Traditional IRA if you’re under 59 ½ years of age. This is not the case with a Roth conversion. You’ll still have to pay tax on that money, but it can be converted at any age without penalty.
Roth IRAs don’t generate taxes or RMDs in retirement.
Unlike with a Traditional IRA, you don’t have to start taking annual required minimum distributions (RMDs) from Roth accounts after reaching age 70½. Instead, you can leave your Roth account(s) untouched for as long as you live if you wish.
Consider the tax implications for your heirs.
The worst thing to leave your heirs is a tax-deferred account, like a 401(k) or IRA. They would actually have to pay income taxes on it. For example, if you leave a traditional IRA to your kids, they are forced to take the RMDs and the additional taxable income could move them up in tax bracket.
If your retirement plan has been built largely with deferred-tax accounts, now is the time to start contemplating a tax-efficient conversion to tax-free keep more money for you and less to Uncle Sam.
To see if a Roth conversion is right for your retirement plan, please, don’t hesitate to contact us.
You can email me at firstname.lastname@example.org or call 320.222.4236.