Does a Roth Conversion Make Sense for You?
A Roth IRA is one of the most impactful wealth-building tools available. Contributions into a Roth IRA are classified as after-tax, allowing funds to grow tax-free for the remainder of its account life – a huge advantage as opposed to other retirement accounts where distributions are taxed. Roth accounts are also not subject to required minimum distributions (RMDs), which means little to no taxes would be paid on funds withdrawn from Roth IRAs during retirement.
If you make too much income to contribute to a Roth IRA directly*, you can still take advantage of these benefits by completing a Roth Conversion. This becomes an even more attractive scenario for someone to convert their Traditional IRA assets to Roth during low market environments, as we have seen recently.
When you convert your account to a Roth, you will report the dollar amount converted as income for that year. Filing higher income on your taxes may seem counterintuitive but converting your account to a Roth now (pre-retirement) allows you to pay taxes on that money now. When you retire, you will not have to pay taxes on those funds when withdrawn, allowing funds to be used towards your goals or needs instead.
Bear markets, though challenging, lend an opportunity to capture the downside when converting your account (buy low, sell high) and will result in a lower tax bill on the conversion than in a bull market. Converting your Traditional assets to Roth during a market downturn allows you to benefit from a rebound even more with tax-free dollars. The IRS allows for partial conversions, too.
Feel free to reach out if this is something you would like to discuss further, and our team would be happy to assist you.
Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor.
There are retirement account risks that could diminish investor returns, such as, but not limited to: low interest rates, market volatility, withdrawal timing and sequence of returns risk, government policy uncertainty and increased longevity. Prospective investors should perform their own due diligence carefully and review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular before considering any investment.