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Is a Roth Conversion Right for You?

March 16, 2022

Is a ROTH Conversion Right For You?

Retirement is meant to be a time to relax, not a time to worry about finances and taxes. However, taxes guide many of our financial decisions and should be taken into consideration early to best prepare for the future. Although you may have a retirement plan in place, there are many benefits to start looking at tax planning sooner rather than later with a ROTH conversion.

In this blog post, we will explain some of the major benefits of converting your traditional IRA or 401(k) to a ROTH IRA to future-proof your retirement plan.

What Are the Benefits of a ROTH Conversion?

Converting your traditional IRA or 401(k) into a ROTH IRA can come with quite a few benefits later in life. These include tax-deferred growth for your money while allowing you to withdraw tax-free income during your retirement years. To help you determine if a ROTH conversion is right for you, here are some of the benefits of converting to a ROTH IRA.

Enjoy tax-free income during retirement

In a traditional IRA or 401(k) account, you will be required to pay taxes on the interest you have earned as withdrawals are made from the account. In addition to this, you will also be required to pay taxes on the contributions you originally made to the account as they were deducted from your taxes earlier.

With a ROTH IRA, your withdrawals are completely tax-free if you meet a few requirements. An individual must have obtained the age of 59 ½ and the ROTH IRA account must have been open for at least 5 years.

Don’t let the IRS tell you when to take money

With a traditional IRA, the IRS mandates you take required minimum distributions every year once you reach a certain age if you haven’t started withdrawing from your account. Although this age has been increased to 72 due to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, it means you must take this money even if you don’t necessarily need it. This requirement gets higher the older you get. You may be increasing your taxable income without having a say in the matter!

A ROTH IRA on the other hand has no required minimum distributions, meaning that you can leave your money to grow tax deferred until you would like to withdraw it.

Tax-free legacy planning

If you have a ROTH IRA that is set to be passed down to anyone other than a spouse, those who inherit it can take required minimum distributions without having to pay any income tax on the withdrawals as long as the deceased owners ROTH account has been open for 5 years. While a non-spousal beneficiary will still have to take all the money out within 10 years of the ROTH IRA owner’s death, the non-spousal beneficiaries are not subject to income taxes if a ROTH is being passed on.

Protect yourself against possible tax rate increases

Although you will need to pay taxes on the amount of money you initially convert, the 10% penalty for early withdrawal is waived if the money is going to be converted to a ROTH IRA before the age of 59 ½. In addition to this, converting to a ROTH IRA can protect you from possible income tax increases in the future. This would make paying the immediate tax worthwhile as all the growth and withdrawals will be free of tax when you are retired.

Why Now?

With the tax laws being known until 2025, we can help you plan ways to optimize a conversion without putting you into a higher tax bracket. This is part of our annual and semi-annual reviews we do with each household.

Reach out to us here at Elevated Wealth Advisory to discuss the ROTH conversion more.