Roth IRAs can be a great way to turn your retirement assets into future, tax-free income. Since the money inside the Roth has already been taxed, you don’t have to pay taxes on qualified distributions and you don’t have to take the required minimum distributions either.
Since we experienced a bear market in 2020, it’s a uniquely good year to consider taking a Roth conversion to minimize the tax you have to pay — using the downturn to your advantage.
However, there’s a lot of fine print that comes along with a conversion, and they’re not right for everyone right now.
When Could A Roth Conversion Be A Good Idea?
- When you think you’ll be in a higher tax bracket in retirement. Whether it’s because of higher income, moving to a high-tax state, or because tax brackets go up over time.
- When your retirement account has lost value, offsetting some of the taxes you’ll owe on the conversion.
- When you have money outside the account to pay the taxes.
When Could A Roth Conversion Be A Bad Idea?
- When you expect to be in a lower tax bracket in retirement. If you’re in a higher tax bracket now, you’ll pay higher taxes on the conversion now than you would later in retirement.
- When you don’t have the cash to pay the taxes that you’ll owe.
- When you expect to need the money in the Roth sooner rather than later. If you withdraw money from your Roth within five years of the conversion, you might owe penalties due to IRS rules and regulations.
Bottom line is: Roth conversions are a great retirement planning tool, but the details of your specific situation matter a lot. And, under current tax rule, conversions are permanent.
If you think that a Roth conversion might be good for you this year, contact our financial advisors to walk-through the process.
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