Converting some (or all) of your traditional IRA into a Roth IRA is tempting, but does it make sense? Here are six questions to ask before making a year-end Roth IRA conversion. BONUS: Be sure to watch until the very end for a special strategy only available in 2020!
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Patrick King is a fee-only financial advisor in Atlanta and the Founder of Prana Wealth. Over his career, Patrick has helped CEOs, all-star athletes, Grammy-winning artists, and many others build their wealth, retire sooner, and create a legacy. Patrick enjoys yoga, mountain biking, golf, travel photography, and Clemson football.
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A Roth IRA conversion can be a great financial move for some individuals. However, before you convert your traditional IRA or 401(k) into a Roth IRA, it’s important to ask yourself a few questions. Here are six questions to help you decide if a Roth IRA conversion is right for you.
1. What is my current tax rate?
Before converting to a Roth IRA, you should consider your current tax rate. A Roth IRA conversion means paying taxes on the amount you convert. If you’re in a higher tax bracket now than you anticipate being in retirement, a Roth IRA conversion may save you money over the long term.
2. How long do I have until retirement?
Time is a significant factor when considering a Roth IRA conversion. The longer you have until retirement, the more time your money has to grow tax-free. If you’re approaching retirement age, a Roth IRA conversion may not be the best move.
3. Do I have the cash to pay the taxes?
If you decide to convert to a Roth IRA, you need to pay taxes on the amount converted. In some cases, the taxes owed can be significant. If you don’t have the cash to pay the taxes, it may be wise to reconsider the conversion.
4. What will my retirement income be?
When deciding on a Roth IRA conversion, consider your retirement income. If your retirement income is high, a Roth IRA conversion could push you into a higher tax bracket. In this case, it may be wise to wait until retirement to make the conversion.
5. How will I use the money in retirement?
It’s important to consider how you plan to use the money in retirement when deciding on a Roth IRA conversion. If you plan to leave the money to your heirs, a Roth IRA may be a better choice because the money won’t be taxed when you pass it on. If you plan to use the money yourself, a traditional IRA may be more beneficial.
6. What are the fees and regulations associated with a Roth IRA?
Before making a Roth IRA conversion, it’s important to be aware of any fees or regulations associated with the account. For example, you may be subject to a penalty if you withdraw the money before age 59 ½. Additionally, some financial institutions charge fees for managing a Roth IRA.
In conclusion, a Roth IRA conversion can be a powerful financial tool for some individuals. However, it’s essential to consider your personal financial situation and ask yourself these six questions before making the move. With careful consideration, a Roth IRA conversion can help secure your financial future.
If i am close to the maximum salary that i cannot make a roth IRA contribution (say 195000), and i convert 50000 into my roth IRA will that extra 50000 be counted as salary and make it so i cannot make the 6000 dollar ROTH IRA contribution? Or is the conversion amount not considered?
It may not be a good idea to put the fastest-growing money in traditional IRA because it could mean endless taxes if you couldn't do (or never do) Roth IRA rollover in a timely manner. So I think bonds are better for traditional IRA. If you are going to diversify your portfolio anyway, why not put bonds in traditional IRA? If the market crashes and you have to take RMD, you can withdraw from those bonds, which often don't immediately turn to crap like stocks do when the market crashes. During 2008-09, both Dow and S&P500 took about FOUR years to get back to their pre-crash high points. So in that situation, ideally you would want to have enough bonds in your traditional IRA to allow you to take 4 years of RMDs. We probably won't have another 2008-09 in a while, but we never know. Next to an emergency fund, the next important thing is probably a well-diversified traditional IRA.
Another guy saying that it’s all very complicated and you need to hire me to manage your money. Instead he could have explained the five year rule , etc.
Is there a video on investing in a ROTH after 60? Not converting to ROTH
Be aware, too, that couples could face an increase in taxes if they divorce or die as each 'single' person is now going to be faced with a different level of taxed income. Look into 'widow's tax trap" for a more detailed explanation. Also, listen to various professionals to learn different perspectives that could apply to you.
Answering the question of " Will you be in a lower tax bracket in retirement" is hard to know since the government will most likely have to raise income taxes to pay our debt. To reduce the unknown future taxes convert as much as you comfortably can. Remember all conversions can be taken out at any time without penalty. It's the gains that must meet the 5-year rule.
This is a very thoughtful consideration of Roth conversions pros and cons. At a time when financial advisors are pushing clients into conversions to reduce future taxes, there are several factors considered in this video that should be considered.