Congress passed a law a few years ago that temporarily lowered tax rates across the board for most individuals.  With these laws set to expire after 2025, you might be wondering: is now a good time to convert my traditional IRA to a Roth IRA?

It might be, but you should be aware of the consequences of adding extra income to your tax return.  While tax rates might be favorable right now, if you decide you want to convert a large sum — that is, extend yourself up another bracket or two — you may be subjecting yourself to more than just extra taxation on that conversion.

What should you be aware of if you decide to convert to a Roth?  Get more information from podcast host Johnny Dean and “Professor” Rick Plum, CFP® on this week’s episode of Managing Your Financial Future!…(read more)

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Is Now A Good Time to Convert to a Roth IRA?

With the current economic uncertainty and market volatility, many individuals are considering their options for retirement savings. One question that often arises is whether now is a good time to convert to a Roth IRA.

A Roth IRA is a retirement savings account that allows individuals to contribute after-tax income, and then withdraw their funds tax-free in retirement. Unlike traditional IRAs or 401(k)s, contributions to a Roth IRA are not tax-deductible, but the earnings and withdrawals are tax-free as long as certain conditions are met.

One of the main reasons individuals consider converting to a Roth IRA is to take advantage of potential tax benefits in the future. With the current economic situation and potential for future tax rate increases, some people believe that converting to a Roth IRA now could make sense.

However, there are a few factors to consider before making the decision to convert to a Roth IRA. First, individuals need to evaluate their current financial situation and determine if they have the funds available to pay the taxes on the conversion. When converting from a traditional IRA or 401(k) to a Roth IRA, the amount converted is considered taxable income for the year of the conversion. This can result in a significant tax bill, so individuals should be prepared to cover the taxes without dipping into their retirement savings.

Secondly, individuals should consider their future tax situation. If they anticipate being in a higher tax bracket in retirement, a Roth IRA could be advantageous as withdrawals from a traditional IRA or 401(k) would be taxed at a higher rate. On the other hand, if they expect to be in a lower tax bracket in retirement, it may not make as much sense to convert to a Roth IRA.

Another consideration is the potential for market returns. If an individual expects their investments to grow significantly over time, they may benefit more from a Roth IRA as the withdrawals would be tax-free. However, if they anticipate lower investment returns, the tax-deferral of a traditional IRA or 401(k) might be more advantageous.

It’s also worth noting that the recently passed SECURE Act has changed the rules for inherited IRAs, potentially increasing the tax burden for non-spouse beneficiaries of traditional IRAs and 401(k)s. This change could make a Roth conversion more appealing for those who want to leave their retirement savings to heirs.

In conclusion, whether now is a good time to convert to a Roth IRA depends on individual circumstances and financial goals. While the current economic climate and potential for future tax increases might make a Roth conversion appealing, individuals should carefully evaluate their financial situation, future tax expectations, and potential market returns before making the decision. Consulting with a financial advisor or tax professional can help individuals make an informed decision that aligns with their long-term financial goals.