Is a Roth IRA Conversion Right for Me?

April 11, 2019
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In life, there are two things that are certain, death and taxes. Even though you can’t avoid paying taxes, you can have some control over when and how much you pay.

The government has generously given taxpayers some retirement savings options that lessen the tax burden making it easier to save for retirement.

Traditional retirement accounts such as IRAs and 401(k)s allow you to save on taxes in two ways:

  • You do not pay taxes on the money that you contribute
  • You do not pay taxes on earnings while the money remains invested in a retirement account.

You only pay taxes when you withdraw money from a traditional retirement account. Since most people are in a higher tax bracket during their working years, this typically works to their advantage. You get a tax break now and you pay taxes at a lower rate in the future when you need to take the money out.

The other option for retirement savers is a Roth IRA. A Roth IRA requires you to pay taxes on the money now but, you will not be required to pay taxes when you take the money out and you will receive tax-free earnings like you would with a traditional retirement account. This option is appealing to many who fear that tax rates may go up in the future and who prefer more control over distributions knowing that taxes will not have to be added to the calculation.

Many people who like the idea of tax-free distributions have a desire to convert traditional retirement accounts to Roth IRAs. While this is permissible, it is not always advisable.

A few things to consider before converting to a Roth IRA:

  • Taxes – A Roth IRA Conversion is considered to be a taxable event and you will be required to pay taxes on any money that you convert. If calculated improperly, a Roth IRA Conversion can create a significant tax bill. It is wise to consult with a qualified tax professional before converting any assets to a Roth IRA to avoid unnecessary tax surprises.
  • Timing – You will need to consider when you will need the funds. While you can withdraw your contributions from a Roth IRA at any time without tax penalty, you will not be able to withdraw earnings until you are 59 ½. Even then, the account must have been open for at least 5 years before you can withdraw earnings penalty free.
  • Tactics – A Roth IRA can be an important piece of a well-rounded retirement plan. A Traditional Retirement Account might also have a place in your plan. It is important to consider your overall retirement goals and utilize the tools that will help you to work toward them. A qualified financial planner can help you to create a plan that considers your specific retirement needs and the products and services that fit best within your plan.

Before converting to a Roth IRA it is a good idea to speak with qualified professionals who can help you determine if a conversion is the right step to take to help you reach your retirement goals.

If you would like to talk about your options, please contact our office and we would be happy to discuss opportunities that might be best for you.

 

Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.

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