People do Roth IRA conversions because they want to save on taxes or create a larger legacy for the next generation. It’s not easy to know if Roth IRA conversions are right for you. The answer to these questions will help you narrow in on this important decision.
🔥 What Issues Should I Consider Before I Retire?
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🔑 Key Topics :
0:00 – Intro
0:57 – Roth Conversions
5:00 – Planning Software
8:06 – Is It Good for Us While We’re Alive?
8:58 – Is It Good for My Heirs?
10:49 – Am I Willing to Let It Defer for Several Years?
11:31 – Outro
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Roth IRA Conversions NOT for Everyone – Ask These Questions First!
When it comes to planning for retirement, making the right financial decisions is crucial. One popular option available to individuals is converting a traditional Individual retirement account (IRA) into a Roth IRA. While Roth IRA conversions can offer several advantages, it is important to recognize that they may not be suitable for everyone. Before jumping into a conversion, it is essential to consider various factors and ask yourself a few crucial questions.
What is a Roth IRA Conversion?
Firstly, let’s understand what a Roth IRA conversion entails. A Roth IRA conversion refers to moving funds from a traditional IRA, which is funded with pre-tax money, to a Roth IRA, which is funded with after-tax income. The primary advantage of a Roth IRA is that withdrawals made during retirement are typically tax-free, making it an attractive option for those seeking tax-efficient retirement savings.
However, it is important to recognize that converting to a Roth IRA comes with its own set of implications and potential drawbacks. This is why it is crucial to ask yourself the following questions before committing to a conversion.
1. Can You Afford the Tax Implications?
One of the primary considerations before converting to a Roth IRA is evaluating the tax implications. When converting, you will need to pay income taxes on the amount you convert in the year of the conversion. This could significantly impact your tax bill for that year. Therefore, it is crucial to ensure that you have sufficient funds available to cover the taxes without impacting essential living expenses or pushing yourself into a higher tax bracket.
2. What is Your Time Horizon?
Another vital factor to consider is your time horizon. Roth IRAs are generally beneficial for those with long investment horizons, as the tax-free withdrawals are available only after five years and reaching the age of 59 ½. If you anticipate needing the funds in the near future, a Roth IRA conversion may not be the most beneficial choice. In such cases, it might be wiser to stick with a traditional IRA or explore other retirement savings alternatives.
3. Are You Eligible for a Conversion?
While anyone can convert a traditional IRA to a Roth IRA, it is crucial to be aware of the eligibility criteria for conversions. In the past, there were income limitations for Roth IRA conversions, but they were lifted in 2010. However, there are still income thresholds that may affect your ability to contribute directly to a Roth IRA. To convert, you must have a modified adjusted gross income of less than $139,000 for individuals or $206,000 for married couples filing jointly. It is essential to consult with a financial advisor or tax professional to determine your eligibility.
4. Do You Foresee Changes in Your Tax Rate?
Consider your current tax rate and whether you anticipate any changes in the future. If you believe that your tax rate will be lower in retirement, converting to a Roth IRA might not be the most advantageous move. In such cases, it may be wise to maintain the tax deduction of a traditional IRA and pay taxes at a lower rate during retirement.
Recognizing that Roth IRA conversions are not suitable for everyone is essential for making informed retirement planning decisions. Carefully examine your financial situation, tax implications, time horizon, and eligibility before opting for a conversion. Consulting with a financial advisor or tax professional can provide you with personalized advice based on your specific circumstances. Remember, making the most suitable decision for your financial future is paramount.
I plan to retire at 50 and there will be 5 bridge years until I start receiving a pension. During the bridge years I plan to live exclusively off savings/money in taxable brokerage. All income will be just interest/dividends which should be under standard deviation amount for a single. I thought this might be an ideal window to ladder roth conversions annually right up to the edge of the 15% tax bracket (these are happening post tax cuts expiration) – totaling some $250K over the five years. If all goes well I hope not to touch the roth until my 70s (16 years after my last conversion). Debating whether it's better to pay the taxes on the conversions from brokerage money or by pulling out past contributions (not gains) out of current roth. As I understand it there are no age penalties for simply taking back your regular contributions; e.g. $6K in 2022, $6.5K in 2023, etc.
And you need to have cash to pay for the Roth conversion
282k in taxed paid vs 295k in taxes paid. Not a huge difference, but there is a difference. You indicated there was no difference.