Is a Roth Conversion Right for You?

In Retirement by lisabiz

Traditional qualified retirement plans allow you to contribute some of your income without paying income taxes on the contribution . . . until you withdraw it during retirement. A Roth IRA works in the opposite way. You pay income taxes on the amount you contribute, but then do NOT have to pay income taxes when you withdraw the money. This is true for both your contribution and the growth during the time it was invested, as long as you follow the rules. Tax-free money during retirement is a wonderful thing!

So, if you have a traditional IRA, should you convert it to a Roth IRA to take advantage of this tax-free income for your retirement?

Here are some of the benefits of converting:

  • The obvious: Tax-Free income during retirement.
  • Grow your money for a longer period. There are no required minimum distributions (RMD’s) from a Roth IRA so you can keep your money earning and growing longer.
  • Get a Roth even if your income is too high to qualify. If you earn too much to qualify for a Roth, you will likely still qualify for a Roth conversion from a traditional IRA. Contributing to a Traditional IRA and then converting it to a Roth will get you the Roth you wanted in the first place.
  • Tax-free money for your heirs. The person/s inheriting your Roth will not owe income taxes on that money, although RMD’s do apply.

Here are some things to consider:

  • You haven’t yet paid income taxes on the money you put into your traditional IRA, so this tax will need to be paid when you convert it to a Roth IRA. You can pay this tax out of your pocket or out of the money in the traditional IRA.   Of course, any money you remove from your retirement account to pay the tax is money that will not be invested and growing for your retirement.
  • When will you need the money? The longer the money is left in the Roth IRA, the more that money will grow and the larger the benefit of the untaxed growth.
  • Will your tax bracket be higher now or later? You would rather pay the taxes in the lowest tax bracket you can. If you are likely taxed at a higher rate after your retirement, then it may be best for you to pay the tax burden now by converting. If, on the other hand, you expect your tax rate to be lower during retirement, it may be better to keep your traditional IRA.

These are some of the things to consider, but this can be a complicated area to navigate. Make sure you contact your financial advisor before you take any actions with qualified retirement plans, just to make sure you understand all of the ramifications of making a particular move.

Securities and advisory services offered through Infinity Financial Services. Member FINRA/SIPC

TAX Disclosure

Infinity Financial, LGC Wealth Management, and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.