Reasons People May Consider a Roth Conversion
People have been converting their IRA accounts to a ROTH account, and I’m here to tell you why that is and why you might consider doing the same.
If you’re planning out your retirement or if you’re currently retired you might already know that with traditional IRAs your putting money into a retirement account prior to paying taxes on it. So essentially, you’re avoiding taxes on that money now while you contribute to your account, you add money to the account, and then you pay taxes on all that later at whatever tax rate applies in the future.
With a Roth IRA you are paying taxes first before you contribute that money to your Roth account, so you don’t get to deduct that income prior to your tax return, but as your money grows it grows tax-deferred and your contributions come out tax free – because you already paid the taxes on it!
Why are individuals considering converting their IRA accounts to Roth accounts? Because of current and future tax rates. The 2017 Tax Cuts and Jobs Act basically drove down federal tax brackets in 2018. Today, if you make $50,000 as a single filer, your tax bracket will be 22% instead of 25% (what it was before the 2017 Tax Cuts). There were many tax cuts for individuals that took place in 2017. Source: https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/
But here’s the thing – those cuts are not permanent. This is all set to expire in 2025. So, if tax rates are lower now than they were before and they’re lower now than they potentially will be in 2025, does that mean taxes are on sale right now? Does this potentially create a window of opportunity for you? Source: https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/
This is why folks are considering converting their IRAs to Roth accounts – to take advantage of current tax rates. By converting to a Roth, you can pay taxes on your retirement money now while taxes are still low and potentially avoid getting all that money taxed later at higher tax rates.
Now, before you go off converting your money to a roth, work with a qualified professional who can help you determine if a roth conversion is in fact a good choice for you. A qualified professional can also help you understand if and how much of your money should be converted and build a strategic way to convert that money to potentially avoid overpaying in taxes in the process.
If you don’t have a financial advisor, feel free to reach out to us at https://eabuck.com/. We have experienced financial advisors who can help you discuss converting money to roth accounts. They’re available for complimentary meetings or even a short phone call if you want to talk through any of this. Whether you become a client of ours or not, we’re happy to answer any questions you might have and give you the info you need.
E.A. Buck Financial Services is an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions. Our firm does not provide and no statement contained herein shall constitute tax or legal advice. All individuals are encouraged to seek the guidance of a qualified tax professional regarding their personal situation. 1250527-3/22.
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