Converting your traditional IRA to a Roth IRA can be a financial power move. While traditional IRAs defer taxes until retirement, Roth IRAs let you pay taxes upfront, ensuring tax-free withdrawals on both contributions and earnings during retirement.
Why Should You Do It?
A Roth conversion is an excellent option for you if:
- You’re concerned about higher future taxes.
- You might be in a higher tax bracket in retirement.
- You have lower income than usual this year.
The conversion allows you to pay taxes now when you’re in a lower tax bracket and keep more of your hard-earned cash in the long run. Your contributions and earnings in a Roth IRA also grow tax-free, enabling you to keep more of your retirement savings.
Let’s say you’re 50 years old and have $100,000 in a traditional IRA. You’re currently in the 24% tax bracket and expect to be in a similar tax bracket in your retirement. You decide to do a Roth conversion and convert your entire traditional IRA to a Roth IRA. You’ll end up paying $24,000 in taxes on the converted amount now, but your money within that Roth IRA will grow tax-free for you or your loved ones in the future.
Continuing with this example, if your money grows at an average rate of 7% per year, it will be worth over $386,000 in 20 years. When you start withdrawing money from your Roth IRA in retirement, you won’t pay any taxes on withdrawals.
Additionally, Roth IRA accounts don’t have mandatory withdrawals in your lifetime, giving you flexibility with your retirement savings. Plus, you’ll pass on the account to your heirs tax-free, saving them a significant amount on taxes.
Tips To Maximize Your Roth Conversion Benefits
Here are some helpful tips to further maximize the benefits of a Roth conversion.
Convert Your Roth Before December 31
Make your Roth conversion count this year. Convert your Roth within the calendar year — December 31st. There is a five-year rule that states you must wait five years after converting money from a traditional to a Roth IRA to withdraw it tax and penalty-free.
Use Roth Conversion as a Tax Hedge
If you’re not relying on your retirement funds now, taking advantage of the opportunity to convert pre-tax money to Roth can be a tax hedge. Doing this while in lower tax brackets helps guard against potential future tax hikes.
Work With Experts
Consider partnering with the SKG team and leveraging our expertise on Roth conversions. We consider your eligibility and current and future income while advising you on growing and managing your wealth pre- and post-retirement. So, why wait? Contact us today!
Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters. CRN202507-5444914