How much should you convert to a Roth IRA? Today, we’ll dive into a scenario inside of NestEgg to show you that.

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One of the most common questions among retirement savers is how much they should convert to a Roth IRA. This question arises particularly when savers reach a point where they start worrying about the amount of taxes they will have to pay at retirement. This article discusses factors that savers need to consider while converting traditional IRA to Roth IRA.

Firstly, it is important to understand that conversion to Roth IRA is a taxable event. This means that savers need to pay taxes on the amount converted based on their tax bracket. Therefore, it is important to take into consideration their current tax bracket and their expected tax bracket at retirement. If savers believe that they will be in a higher tax bracket during retirement, then it makes sense to convert some or all of their traditional IRA to a Roth IRA.

The next factor to consider is their required income for retirement. If they have enough funds to cover their expenses during retirement, it might not make sense to convert to a Roth IRA, especially if the plan is to leave the funds to heirs who are in a lower tax bracket. In such cases, it is advisable to leave the traditional IRA as is.

Another factor that savers need to consider while converting to Roth IRA is their age. If they are close to retirement and are unlikely to withdraw from their IRA in the near future, then it could make sense to delay conversion. Any funds that remain in traditional IRA can continue to earn interest, and savers can withdraw the funds at a later date when their tax bracket is lower.

Savers also need to take into consideration their cash flow and available tax deductions. If they can afford to pay the taxes that come with a conversion, then it could make sense to convert some or all of their traditional IRA to a Roth IRA. Additionally, if they have other deductions such as mortgage interest, medical expenses, or donations to charity, they can use these deductions to offset the taxable income from the conversion.

In conclusion, the amount to convert to a Roth IRA depends on several factors that savers need to consider before making a decision. These factors include their current tax bracket, expected tax bracket at retirement, required income during retirement, age, available tax deductions, and cash flow. It is advisable to seek the services of a financial advisor when making such decisions as they can provide guidance tailored to individual situations.