2021 is coming to a rapid close, and historically low tax rates are quite likely to increase in the near future. Now is an excellent time to consider a Roth conversion. However, they can be complicated, so it's crucial to understand what’s entailed.
First Of All, What Is A Roth Conversion?
It's when you move (convert) your money from a tax-deferred Traditional IRA into a tax-free Roth IRA.
As a reminder, an IRA is a tax-deferred retirement account, so it is funded with pre-tax money and the taxes are paid when money is taken out of the account in retirement.
A Roth, however, is funded with after-tax money, so it is tax-free and has no distribution requirement.
When you convert traditional IRA assets to Roth IRA assets, you will have to pay tax on the amount of the conversion in the year of the conversion.
Once the assets are in a Roth IRA, however, they can grow tax-free forever (at least that’s the rule for now).
With a traditional IRA, owners are forced to begin taking taxable distributions once they turn 72. With a Roth IRA, there are no mandatory distributions.
Should You Consider a Roth Conversion This Year?
Here are four of the more common reasons a Roth conversion might make sense for you.
- You expect your tax rate to be the same or higher in the future. Converting IRA assets to a Roth now could be a good move if you expect to have a higher tax rate later in life.
- You are retired and are delaying claiming Social Security. If you find yourself in a lower tax bracket because you’re not working any longer and are not claiming Social Security, it may make sense to do a Roth conversion to take advantage of your temporarily lower tax bracket.
- Your income in 2021 is lower than usual. If your income for the year is down over previous years, a Roth conversion may be a tax-friendly way to get more money in your Roth.
- You expect to make a large charitable donation. The deduction you receive from a charitable donation can help to offset the tax liability of a Roth conversion.
Roth conversions make sense for many people. However, they do not make sense in every situation.
Each person must consider their own specific financial circumstances to figure out if a Roth conversion is the right thing to do. A Roth conversion increases your taxable income that year, and it may push you into a higher tax bracket or affect other things like your Medicare Part B surcharges.
When making important financial decisions like this, it always helps to talk to an experienced professional who can help you understand your options and the implications of different choices.
If you are considering a Roth conversion for this year, please call the office at 770.249.7424. One of our Advisors can help you get the information you need to choose the best option for your specific retirement goals and current situation.