If you have been contemplating converting your IRA to a Roth IRA, here are some things to consider. Maybe you’d rather pay tax on your retirement savings now, while you are in a better financial situation to do so. Then, later as your investment has grown and you are taking the distributions, the funds will be tax-free. Save now, pay now, increase in value and be tax-deferred later when you need it. For this to work for you, it depends on your tax bracket. If you believe your tax bracket will be lower at retirement time, a Roth may be the ticket.
When converting a traditional IRA to a Roth IRA, those tax-deferred funds will be lumped into your income earnings for that year. However, the Tax Cuts and Jobs Act has lowered the individual federal income tax rate through 2025. So now may be the time to make the switch. If your switching transaction will put you in a higher tax bracket, you should consider taking the withdrawals bit by bit over a few years so you can remain in the same tax bracket.
At age 72 you are required to take minimum distributions (RMDs) from your traditional IRA. A Roth IRA has no required distributions at any age. The only exception is with an inherited Roth IRA.
If you earn a high income you can’t go directly into a Roth IRA, but you can convert your IRA to a Roth. A SEP – simplified employee pension, a SIMPLE IRA – a savings incentive match plan for employees or traditional IRA can all be converted to a Roth IRA. If you no longer work for the employer who sponsored your 401(k), 403(b) or governmental 457(b) that plan can also be converted to a Roth IRA.
You can’t take withdrawals from a Roth within 5 years of conversion or you will pay a 10% tax penalty; this doesn’t apply if you are 59 ½ or older. Once funds are invested in a Roth it is permanent and no longer able to be converted back to a tax-deferred retirement account.
A financial advisor can help determine which type IRA would be the best investment for you. I will be happy to direct you into the retirement vehicle that will suit your needs best and hopefully lead you into a care-free future. Make an phone call appointment today 215.836.4880.