The question of transitioning to a Roth comes up frequently in conversations with clients.
A Roth IRA conversion involves moving your traditional IRA money—which is typically pre-taxed—to a Roth IRA, where your contributions can grow tax-free.
Sounds appealing, right? But like any financial decision, it comes with its own set of tradeoffs.
Tax-Free Growth: One of the biggest advantages is that your money grows tax-free. This means you won’t pay taxes when you make withdrawals in retirement.
No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs don’t require you to start taking minimum distributions at age 72. This gives you more control over your funds and how they’re used.
Immediate Tax Liability: Converting to a Roth IRA means you’ll have to pay taxes on the converted amount now, which can be a significant hit if you’re moving a large sum.
Temporary Higher Tax Bracket: This conversion could push you into a higher tax bracket temporarily, increasing your tax burden for the year of the conversion.
Converting when your income is lower can reduce the tax impact. Early retirement years or periods of reduced income might be ideal for conversion. Plus, the longer it sits, the more beneficial the tax-free growth can be.
Remember, a well-thought-out Roth IRA conversion can significantly impact your retirement savings. Always consider the tradeoffs, and seek professional guidance to make an informed decision.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/ SIPC.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing.