Did you know you can convert your traditional IRA to a Roth IRA? Navy Federal’s personal finance experts explain how this can benefit you.
What would you like our experts to talk about next time? Comment below.

Subscribe to the Navy Federal channel:

Connect with Navy Federal online
Website:
Facebook:
Twitter:
Instagram:
Google+:
YouTube: …(read more)

LEARN MORE ABOUT: IRA Accounts

INVESTING IN A GOLD IRA: Gold IRA Account

INVESTING IN A SILVER IRA: Silver IRA Account

REVEALED: Best Gold Backed IRA

Money Minute: Converting Traditional IRA to Roth IRA

One important financial decision that many individuals face is whether or not to convert their Traditional Individual retirement account (IRA) to a Roth IRA. This conversion can have significant implications for your retirement savings and tax planning. In this Money Minute, we will explore the basics of converting your Traditional IRA to a Roth IRA and highlight some key considerations.

But first, let’s understand the key differences between a Traditional IRA and a Roth IRA. Traditional IRAs allow you to contribute on a pre-tax basis, which means you can deduct your contributions from your taxable income. The contributions grow tax-deferred until you withdraw them during retirement, at which point they are subject to income tax. On the other hand, Roth IRAs are funded with after-tax dollars, so contributions are not tax-deductible. However, the growth and withdrawals from a Roth IRA are generally tax-free, provided you follow certain rules.

Now, let’s explore the process of converting your Traditional IRA to a Roth IRA. The conversion involves moving the funds from your Traditional IRA into a Roth IRA. When you do this, you will be required to pay income taxes on the amount you convert. This can result in a potentially large tax bill, especially if your Traditional IRA has accumulated a substantial amount over the years.

So, why would someone choose to convert their Traditional IRA to a Roth IRA? One of the primary reasons is to take advantage of the tax-free growth and withdrawals that a Roth IRA offers. By converting to a Roth IRA, you potentially eliminate the future tax burden on your retirement savings. Additionally, if you expect your tax rate to increase in the future, converting to a Roth IRA now allows you to pay taxes at your current, presumably lower tax rate.

However, it’s important to note that there are certain eligibility requirements and restrictions for converting a Traditional IRA to a Roth IRA. Firstly, there is an income limit for Roth IRA conversions. If your modified adjusted gross income (MAGI) exceeds a certain threshold, you might not be able to convert directly to a Roth IRA. However, there is a loophole called a “backdoor Roth IRA” that allows high-income earners to get around this limit by making a non-deductible Traditional IRA contribution and then converting it to a Roth IRA.

Another factor to consider is the time horizon for your retirement. If you have many years until retirement, converting to a Roth IRA could be beneficial as it allows your contributions to grow tax-free over a longer period. On the other hand, if you are close to retirement or anticipate needing the funds in the short-term, it may not make sense to convert, as you may not have enough time for the tax-free growth to outweigh the immediate tax burden.

Lastly, keep in mind that tax laws and regulations can change, so it’s essential to consult with a financial advisor or tax professional before making any decisions regarding a Traditional IRA to Roth IRA conversion. They can help assess your individual situation, provide guidance, and ensure you comply with any tax rules and regulations.

In conclusion, converting your Traditional IRA to a Roth IRA is a decision that requires careful consideration. While the potential tax-free growth and withdrawals of a Roth IRA can be attractive, it’s crucial to weigh the upfront tax costs, eligibility requirements, and your retirement timeline. Seeking professional financial advice can help you make an informed decision that aligns with your financial goals and ensures a smooth transition to a Roth IRA, should you choose to convert.