Kathleen Coxwell of NewRetirement shares why a Roth conversion or backdoor Roth IRA is a good idea right now

Episode 2133: Why a Roth Conversion or Backdoor Roth IRA is a Good Idea Right Now by Kathleen Coxwell

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As we move towards the year 2133, there is a growing need for individuals to consider the benefits of a Roth IRA conversion or Backdoor Roth IRA. This strategy has become increasingly popular in recent years as more people look for ways to maximize their retirement savings and minimize tax burdens in the future.

If you have a traditional IRA or a 401(k) plan, you may be wondering why you should consider making the switch to a Roth IRA. The answer lies in the tax advantages that this type of account offers.

When you contribute to a traditional IRA or 401(k), you do so with pre-tax dollars. This means that you don’t pay taxes on the money you contribute until you withdraw it in retirement. Conversely, when you contribute to a Roth IRA, you do so with after-tax dollars. While this means you’ll pay taxes on the money now, you won’t have to pay any taxes when you withdraw the money in retirement. This can be a huge benefit, especially as tax rates are expected to rise in the coming decades.

Additionally, Roth IRAs have other advantages that make them a smart move for savers. For example, there are no required minimum distributions (RMDs) for Roth IRAs, which means you can keep your money invested and growing tax-free for as long as you’d like. This can be especially helpful for those who want to leave their retirement savings to heirs.

So, why is now the time to start thinking about a Roth IRA conversion or Backdoor Roth IRA? One reason is that tax rates are currently at historic lows. This makes it a great time to pay taxes on your retirement savings now, while rates are low, instead of waiting until retirement when rates may be significantly higher.

Additionally, the SECURE Act, passed in 2019, changed the rules around inherited IRAs. Previously, heirs could stretch out their payments over their lifetime, but now most heirs must withdraw the entire balance within 10 years. This means that a Roth IRA may be a better option for those looking to leave their retirement savings to loved ones.

Of course, there are some important considerations to keep in mind when making a Roth IRA conversion or Backdoor Roth IRA. For example, you must pay taxes on the money you convert, so it’s important to work with a financial professional to ensure that the conversion makes sense for your specific financial situation.

Overall, however, a Roth IRA conversion or Backdoor Roth IRA can be a smart move for those looking to maximize their retirement savings and minimize future tax burdens. With tax rates expected to rise and the SECURE Act changing the rules around inherited IRAs, now may be the perfect time to consider this strategy.