Depending on your current income and tax bracket, now might be a great time to convert your accounts to a Roth IRA. In this video, I explain what a Roth conversion is and why the current market conditions make it more appealing to pull the trigger and pay the taxes now so you can enjoy tax free money later on.
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With the current economic uncertainty due to the pandemic, many investors are wondering whether now is a good time to convert their traditional IRAs to Roth IRAs. While it’s impossible to predict the future, there are a few factors to consider before making this decision.
First and foremost, it’s important to understand the difference between traditional and Roth IRAs. Traditional IRAs allow investors to make contributions with pre-tax dollars, which means they can reduce their taxable income each year. However, withdrawals from traditional IRAs are taxed as income in retirement. In contrast, Roth IRAs are funded with after-tax dollars, so contributions don’t reduce taxable income. But, qualified withdrawals in retirement are tax-free.
One reason to consider converting to a Roth IRA is if you expect to be in a higher tax bracket in retirement. By paying taxes on your contributions now, you can avoid paying higher taxes later when you withdraw your funds. However, if you expect to be in a lower tax bracket in retirement, it might be better to stick with a traditional IRA.
Another factor to consider is your current financial situation. If you have a large amount of cash on hand, it might make sense to convert to a Roth IRA now. This is because you’ll need to pay taxes on the conversion amount, and having the cash to cover that tax bill can make the process smoother. On the other hand, if you’re currently experiencing financial hardship due to the pandemic, it might be better to hold off on a conversion until your situation stabilizes.
Finally, it’s important to consider the potential long-term benefits of a Roth IRA conversion. With a Roth IRA, you won’t be required to take minimum distributions at age 72 like you would with a traditional IRA. This means you’ll have more flexibility in retirement to manage your withdrawals and taxes.
Overall, now could be a good time for some investors to consider converting to a Roth IRA. However, it’s important to carefully evaluate your individual financial situation and consult with a financial advisor before making any decisions. By doing so, you can make the best choice for your long-term financial health.
I wish I discovered you sooner Rick! For the past 3 years I've been maxing out my trad IRA but thanks to your vid it makes sense right now to convert to it all to Roth since market is down and I'll still remain in the same low tax bracket even after converting it all to Roth.
Problem is for I already contributed my 6k to traditional for the 2022 year. If I convert my entire trad account ($18k) to Roth, would I be paying taxes twice on the $6k from this year since it's already post-tax dollars? I know I need to pay taxes on the $12k from previous years since I used them as tax deductions in the past but I'm unclear on if IRS will tax me on the full $18k or just the $12k portion?
Any help would be appreciated, and thanks for everything you do!
Very good video! Now I fully understand Roth IRA conversion. You explained it very clearly better than my financial advisor!
Rick, you are an awesome teacher! This was a great explanation. I'm starting in the Financial Planning career, and I too use (and love) the RightCapital software. It helped me truly understand how tax-free income (like Roth qualified distributions), not only can save income taxes during retirement, but also can help lower Medicare premium costs, as they are calculated based on Modified Adjusted Gross Income. Would you like to make a video with a case scenario about this?
Also, on another note, did you know about YouTube's Super Thanks button? Check it out! These videos take a great effort to make. It would be great to have the option to start rewarding you for this amazing information you passionately share. Thank you!
Been thinking about discussing this with you because the markets are down.
I don’t really leave reviews. But your Chanel is sooo good! No one explains in such an easy manner. I watched another video and totally wanted to switch to Roth IRA. But now, that you explained, with my tax breaks it makes zero sense. I also bought I bond and I think you made that video how to navigate on that silly website just for my comment. Thank you for that as well.
I have another question. My attorney said to ask CPA, I figured may be it’s smth you can make video on.
I have 2 bdr. Now I am buying 1bdr for my mom on my name which is 1 bdr and claim it as investment property. ( she has her reasons why we don’t claim it as her primary residence)
Can I, at some point, start to claim this 1 bdr as primary residence? What do I do to claim smth as a primary residence? Just to tax return on that address?
May be there is some taxation rules on having multiple properties but not actually renting them?
Thank you so much.
Def planning to do a Roth conversion this year due to market conditions…just not sure how much because we don't want to get bumped up into the next tax bracket. Great video, Rich!
So when you transfer money to roth and have to pay taxes that comes out of your pocket that year since you can’t touch your roth or 401k.
Very helpful. I may do one this year due to a few factors. One being the down market.