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When To Convert To Roth IRA (Part 1)
Individual Retirement Accounts (IRAs) are popular savings vehicles that offer tax advantages for retirement savings. One type of IRA is the Roth IRA, which differs from traditional IRAs in that contributions are made with after-tax dollars, and withdrawals in retirement are typically tax-free. Converting from a traditional IRA to a Roth IRA can have significant tax implications, so it’s important to carefully consider when the right time to do so might be.
There are a few key factors to consider when determining when to convert to a Roth IRA. One important consideration is your current and future tax situation. When you convert to a Roth IRA, you will have to pay income tax on the converted amount in the year of the conversion. If you expect your tax rate to be lower in the year of conversion than it will be in the year you plan to withdraw the funds from the Roth IRA, it may make sense to convert now and pay lower taxes on the conversion. Conversely, if you expect your tax rate to be higher in retirement, it might make sense to delay the conversion until then.
Another consideration is your overall financial situation. If you have the cash available to pay the taxes on the conversion without dipping into your retirement savings, you may be in a better position to make the conversion. Additionally, if you expect to be in a lower tax bracket in the year of conversion due to deductions or significant changes in income, it might make sense to convert at that time.
It’s also important to consider your long-term financial goals and the potential impact of a Roth IRA conversion. A Roth IRA can offer valuable tax benefits in retirement, but it’s not the right choice for everyone. If your goal is to leave a legacy for your heirs, a Roth IRA can be a valuable tool for passing on tax-free assets. Additionally, if you expect to have a high income in retirement, the tax-free withdrawals from a Roth IRA can be especially beneficial. On the other hand, if you expect to have a lower income in retirement, the tax-deferred growth of a traditional IRA might be more advantageous.
In part 2 of this article, we’ll explore more factors to consider when deciding whether to convert to a Roth IRA, as well as some strategies for managing the tax implications of a conversion. Making the decision to convert to a Roth IRA is a complex one, and it’s important to carefully consider your individual financial situation and consult with a financial advisor to determine the best course of action.
I wish people would stop calling Roth IRA tax free when clearly it drives the same tax bill as a regular IRA taken at the same year with the same income (at the beginning). Please come up with new wording maybe "already taxed Roth IRA" Total agree on the later years, just hate the wording everyone uses.
Excellent video!
Josh if you have a good fixed income with survivors ssa, DIC and a small pension meeting all my expenses do I need to have so much in retirements assets to guard against inflation? No debt.
I'm just curious. Why wouldn't someone just do a Backdoor Roth Conversion each year to eliminate paying taxes at all, particularly if you are a high-income earner who makes too much to contribute to a Roth IRA? That would eliminate the need of going through this down the road during retirement.
Thanks Josh enjoy the weekend
Joshua,
You know me by now. If it sucks, I will tell you straight up. No reasons of agenda to lie or sweet coat things here.
This is probably the most important work you have done to date because of the number of people it applies to and the amount of confusion on it that exists.
This applies directly to us with higher numbers plus pass through business, plus rentals. We are looking at 1031 exchanges when we sell the rentals in in about 15 years or so.
We plan not only to buy your book on this but gift it to family and friends that we know this applies to. Thanks and Congratulations for your best work to date.
Sincerely,
Alberto
Great job! Can’t wait for part two.
I'm slow, so please excuse my stupid question. Are the principal contribution + capital gains taxed in a Roth conversion, or only the principal contribution?
I just found out my ER plan sponsored 401k charges $150 PER CONVERSION! I was going to make $1,000 monthly conversions but that would be 15% of my conversion. This sucks!
Thanks Josh great review of Roth's and how to use them for best advantage.
Great video josh. Does personal capital take into account the following 1. How much ss is taxable based on 'other income' and 2. Does it assume current tax rates (TCJA) until '25 or does it assume it sunsets?
If the Secure Act passes, how does that affect the beneficiaries after both spouses die?
This is great stuff! The plan you outlined at 60 is exactly what my wife and I are planning on doing. By the time we retire at 60 in about 5 years, we should have about $1.2 million in 401k and IRAs. There is a much smaller amount currently being held in Roth 401k by both my wife and I. The plan is to not apply for social security until FRA and live on our 401k distributions until then. At the same time, begin doing Roth conversions so we can convert the entirety of our savings to Roth by age 70 to avoid RMDs.
Great video. Could you possibly include in part 2 some comments about the duration of time a Roth needs to be held before you can access funds without penalty? Thanks!
Excellent article! Looking forward to ROTH Part 2!