Tax and IRA expert Ed Slott on when conversions can result in the greatest tax savings—and what to know before you execute them.
00:00 Introduction
00:34 Why would someone want to convert traditional IRA balances to Roth?
01:54 Taxes during a Roth IRA conversion
03:17 When should someone not convert to a Roth IRA?
06:10 Are there any life stages that are best to convert to a Roth IRA?
07:45 What documentation do you need to prove you have done a conversion?
09:10 Do you file your 1099?
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As the stock market continues to be unpredictable and volatile, many investors may be wondering if now is a good time to convert their traditional Individual retirement account (IRA) to a Roth IRA. While there is no one-size-fits-all answer to this question, there are several factors to consider before making a decision.
Firstly, it’s important to understand the difference between a traditional IRA and a Roth IRA. Traditional IRAs allow individuals to contribute pre-tax dollars to their accounts, which can be taxed upon withdrawal in retirement. Roth IRAs, on the other hand, are funded with after-tax dollars, meaning there are no taxes owed upon withdrawal in retirement.
When converting a traditional IRA to a Roth IRA, individuals must pay taxes on the amount being converted in the year it is done. This means that if the market is down and the value of the traditional IRA has decreased, the taxes owed on the conversion may be lower than if the market were up and the value of the traditional IRA was higher.
However, it’s important to remember that converting to a Roth IRA is a long-term strategy. The benefits of a Roth IRA comes from the tax-free growth and withdrawals in retirement, not from temporary fluctuations in the market. While a down market may present an opportunity for lower taxes on the conversion, it’s important to have a long-term investment strategy and not make decisions solely based on short-term market conditions.
Another consideration is an individual’s tax bracket. If an individual expects to be in a lower tax bracket in retirement, it may be more beneficial to stick with a traditional IRA, as they will pay fewer taxes upon withdrawal.
It’s also important to consider the individual’s overall financial situation. Converting to a Roth IRA requires paying taxes upfront, which can limit liquidity and potentially impact other financial goals. It’s important to assess whether the benefits of a Roth IRA outweigh any potential short-term financial limitations.
In conclusion, while a down market may present an opportunity for lower taxes on IRA conversions, it’s important to remember that the decision should be based on a long-term investment strategy and overall financial situation. Individuals should consult with a financial advisor and carefully weigh the potential benefits and drawbacks before making a decision.
I can think of a couple of other scenarios, where it wouldn't make sense..1) The value of the investments that you have converted has DECLINED dramatically, by the time you are ready to take the "rothed" proceeds. 2) You DIE, before you ever begin to take withdrawals from the proceeds which you have "rothed", and you have no heirs.
I have $1.15 M in taxable retirement accounts and no matter how many times I do the math RMDs won't raise my taxes until I'm well into my 80's. Why pay extra taxes now to potentially save if I live into my 90's?
I don't know why anyone calls Roths tax free. They are after tax! You pay the highest marginal rate now to put money in and take it out and after deductions you are paying a much less effective tax rate. So don't do all Roth, do a mix of Traditional and Roth. Or Roth in your early years and Traditional in your later years of work. My opinion anyway.