We help our clients with Roth IRA conversions all the time and maybe you’re thinking that converting to a Roth is good for you. Before you do that conversion here are a few things you may want to consider.
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If you’re considering converting some of your retirement savings into a Roth IRA, you’re probably wondering if it’s the right move for you. A Roth IRA conversion can be a smart financial move, but it’s not for everyone. Here’s what you need to know before you decide if a Roth IRA conversion is right for you.
A Roth IRA conversion involves taking money from a traditional IRA or 401(k) and moving it into a Roth IRA. The advantage of a Roth IRA is that your money grows tax-free and you won’t have to pay taxes on the withdrawals when you retire.
So should you do a Roth IRA conversion? It depends. Generally, it’s a good idea if you’re in a lower tax bracket now than you expect to be in when you retire. That way, you’ll pay taxes on the money at a lower rate now, and you won’t have to pay taxes on it at all when you withdraw it in retirement.
It’s also a good idea if you think you’ll need the money in retirement. With a Roth IRA, you can withdraw your contributions at any time without penalty. That means you can access the money if you need it in retirement without having to pay taxes on it.
On the other hand, a Roth IRA conversion may not be a good idea if you’re in a high tax bracket now and expect to be in a lower one when you retire. In that case, it would make more sense to pay the taxes now and save on taxes later.
You should also consider the cost of the conversion. Depending on the amount you’re converting, it could be a substantial amount. You’ll also need to factor in any fees associated with the conversion.
Finally, you should consider the impact of a Roth IRA conversion on your retirement savings. Converting a large amount of money could reduce the amount you have available for retirement.
Ultimately, whether or not a Roth IRA conversion is right for you depends on your individual circumstances. Make sure to talk to a financial advisor to get an idea of what’s best for you.
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How much in taxes would I pay on a conversion of let's say 1,600k I'm in illinois?
If you convert a traditional IRA into a Roth IRA, do you have to pay taxes on the full account amount (including gains made)? Or do you have to pay taxes only on the amount you had contributed into the traditional IRA that were tax free?
Unless you plan on taking the money out before 59.5 years old, a regular IRA/401k is best. If you have $10,000 to invest you can put it in a regular IRA or pay taxes on it and put what is left in an IRA. Let us say you are now in 22% bracket, you can put $10,000 in an IRA or pay taxes on it and put $7,800 in the Roth. For comparison let's say you would have a 900% return on your investment which would give you $100,000 in the reg IRA and $78,000 in the Roth. Without your working income you start at the bottom brackets of 0%, then 10%, then 12%.before reaching the 22%. Without the working income you would pay the lower tax rates in retirement giving you much more left in the IRA than the $78,000 with the Roth. All the money I paid into my IRA I avoided paying a 34% fed and state tax on and I have taken 12k out for 13 years and not paid a penny tax on it. It would be quite unusual to pay a higher rate in retirement. I will be keeping $70,000 of tax money for myself.
I’ve watched several videos on Roth conversation and Justin u get a A+ on your presentation !!!
@6:06 i just had a bruce almighty moment…
When you need to convert over a million its difficult not to use 401k distributions to pay the IRS.
#1. You are talking about the ROI on the tax paid. You are going to pay that no matter what, if you let it set, you pay a higher tax just on the growth without counting the cost of rising tax rates.
If I were to convert a traditional IRA that is worth $20,000 but the contributions were only $10,000 (I doubled my money through returns over the years), then would I pay my tax rate on the $10,000 that was invested, or the $20,000 that it has grown into?
Thanks!
If you are thinking about long term growth and you have the cash to pay the taxes the answer is always yes. The only real consideration would be if the conversion pushes you into a different tax bracket for the year. I that case, do partial conversions over the course of time. Done.
Good morning, I am 52 years old and would like to start an IRA. I do not have much to start but I do need to start. my income is $70,000 year. Can I start an IRA and before I retire convert to Roth IRA?
Or should I just go with Roth IRa period?
Great info,, can you make a video about Acorn investment ? Thank You
I retired at 56 yrs old. I plan to convert from the 401K, but over time so I don't hit the next marginal tax rate.
Do you offer a fund for kids that do not make an income? For instance my baby will be born late this year and I want to have a fund to dump money in and grow with the market until they are 18. Any idea?
Thanks for video. I’m 62 and going on the ACA shortly so need to have minimal Income for subsidies. My goal at 65 and until RMD kicks in is to convert enough to stay in 12% tax bracket (currently a little over 100k). Then my wife and I take SS at 70. By doing the Roth conversions, my SS taxable rate will be much lower than the 85%. Win, win.
Dustin, when paying for the conversions taxes out of the IRA itself does the money you use to pay the taxes count as a distribution? Seems like that could be another pitfall for those under 59.5, if it’s subject to early withdrawal penalties.
I'm not sure that break even analysis you did holds any water. If someone could theoretically converted and withdrew on the same day, there would be $0 tax difference because the same tax rate is applied. The dollar value of the account is less important than everything else you said (type of revenue streams in retirement, current and future tax rates)
Another great vid. I’d have to go to 3 other creators to get the same info I can get here. Thanks
Great video. Thank you!
I’m hoping to be taxed 10 percent lower in retirement years, I’ll pass.
You did not explain why not to use IRA funds to pay for the conversion. You just said it does not "feel" right. I don't know what that means. Unless your IRA is small, you probably don't have the cash available, and if it is small IRA, there is little tax benefit to converting. But other than that, very good discussion.
Thanks Dustin great walk through on considerations .
Well explained. Some other doesn't need this but some will. This will help people to understand Roth IRA really well.