Worried About Taxes at Retirement Age? Consider a Roth Conversion

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All retirement account types offer unique tax benefits. Traditional IRAs alleviate your financial burden in the near term by allowing tax-deferred contributions. The IRS will then collect taxes upon distribution of your retirement funds or assets down the road. This model is designed to provide a notable financial benefit by putting off payments to the IRS until you reach retirement age and you’re presumably in a lower tax bracket. However, even reduced taxes can be cumbersome if you’re on a fixed income later in life. This can be especially true once you reach age 70 ½ and required minimum distributions begin.

Roth IRAs offer a converse relationship. You may not take a tax deduction on your contributions, but earnings may be distributed tax-free provided you reach age 59 ½ and the account has been open for five years or more. Roth IRA holders are also exempt from required minimum distributions, which reduces financial obligations and creates opportunities to build generational wealth.

Perhaps you’ve already built an impressive Traditional IRA but want the additional tax advantages of a Roth IRA. Utilizing a Roth account could maximize your earning potential or help offset any losses you’ve sustained in the past. Fortunately, you won’t have to open a new account and start over if this is your desired path. You may instead adjust some or all of your existing pre-tax holdings to a post-tax status by executing a Roth conversion. There are no limitations to the size and scope of allowable conversion activities at this time, so you could combine multiple Traditional IRAs at any value into a single Roth IRA if you’re so inclined. You may also convert your assets in-kind, so you wouldn’t have to liquidate your holdings before making the switch.

Because contributions and earnings in a Traditional IRA are tax-deferred, any cash or assets would be added to the plan holder’s income in the conversion year and taxed accordingly (in a similar manner to a pre-tax distribution or Roth contribution). Any future distributions will bear tax-free benefits if the guidelines for qualified Roth IRA distributions are followed. Once the process is complete, you may enjoy the growth and distribution of your established assets as if they were held in a Roth IRA all along.

For more information about initiating a Traditional IRA to Roth conversion, please don’t hesitate to contact New Direction IRA.

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