Should I do a Roth Conversion?

September 2, 2022

A Roth IRA, in my opinion is one of the best retirement accounts available. The Roth IRA provides you tax-free income during retirement, gives you the ability to leave the remaining funds to your heirs tax-free, and does not make you take annual required minimum distributions (RMDs). You do have to have earned income to contribute to a Roth IRA and there are income limits for contributions. There are strategies to get around the income limits by doing a backdoor Roth IRA or a Roth conversion. I want to focus on the Roth conversion and talk about whether the Roth conversion makes sense for you.

Do you think your future tax bracket will be higher? If you think that your future tax bracket will be higher, even in retirement, converting your 401(k) or IRA into a Roth would be a taxable event but then allow tax-free distributions during retirement.

Do you want to take advantage of market dips? When the stock market goes down and your shares are not worth what they were, you can convert those shares (in kind) into a Roth and pay taxes on the lower amount. When the market recovers, your shares will grow tax-free until you decide to sell.

Do you want to hedge your bet that taxes will be higher in the future? If you think that taxes will rise or there may be changes made to tax rules for Roth IRAs, then doing a Roth conversion would avoid any tax hikes in the future.

Do you want to avoid having to take RMDs? Your Roth IRA does not require you to ever take out annual distributions because you already paid taxes on the principal, so the IRS won’t benefit by requiring RMDs from your Roth IRA. However, if you inherit a non-spousal Roth IRA you do have to take the whole value of the Beneficiary Roth IRA within 10 years.

Determining if a Roth conversion is right for you depends on your personal situation and your financial goals which can be determined by putting together a financial plan. We offer a complimentary plan to show you where you are and if you will meet your goals. We then make suggestions, so you feel financially secure and confident. Give us a call and we can see if a Roth conversion is right for you.

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