Roth IRA Conversion

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You’ve likely heard a lot about doing a Roth IRA conversion. It can be confusing to look at all of the factors that need to be considered to know if a conversion is right for you. Basically, this conversion is when you change your traditional IRA to a Roth IRA. There are some benefits for doing this, but there are also some consequences that you will need to be aware of before you decide to proceed.

The first step to knowing if a Roth IRA conversion is right for you is to understand the difference between a Roth IRA and a traditional IRA. With a traditional IRA, your IRA contribution is made with post-tax dollars, and dividends from your IRA may be taxed as your money grows. This means that you need to make reports to the IRS as your money grows, too. Then, you pay tax on the capital gains you enjoy when you withdraw the money later in retirement. With a Roth IRA, however, you also make contributions from post-tax dollars, but your income grows tax-free. The benefit here is obvious. There isn’t a double taxation factor occurring with a Roth IRA.

If you are thinking about doing a Roth IRA conversion, there are a few things you need to know. First, you may have some taxes due initially if you decide to do a rollover or conversion, but often these taxes are far lower than what you’d pay if you carry your traditional IRA through to retirement. You probably need to talk to your tax professional to determine the tax consequences of your conversion, but bear in mind that the process of converting is not a tax-free process.

Then consider how much of your retirement funds, including traditional IRAs and any 401(k) funds you want to include in the conversion. You do have the choice of how much of your current account balances you want to include. This isn’t an all or nothing sort of deal. This can have some pretty big ramifications for you in the long run, so again, it’s advisable to talk to your tax professional, financial advisor, or anyone else you go to get financial help in planning for the future.

You should also take some time to consider all of the financial factors involved in your Roth IRA conversion. Your current tax bracket as well as your age are included in these factors because your current tax bracket will determine the taxes you need to pay now with the conversion. Often even if you are in a high tax bracket now and are still several years away from retirement, it’s often better to go ahead and do the conversion because you will be paying taxes each year until retirement as your money grows. But again, your financial planner and tax advisor can help you with this decision.

The consideration to do a Roth IRA conversion can be a tricky one because there are several factors to consider. But you don’t need to swim through these waters alone. Use the resources available in your financial planner and accountant to make an informed decision that’s right for you.

Need help with your Roth IRA? Find out more about Roth IRA rules and how they affect your retirement. Ready to start investing? A stock newsletter may help you get the jump start you need.