We often talk about Roth IRAs – and for good reason, as they are a great tool for tax-free earnings growth.
Roth IRAs are primarily touted as savings vehicles for lower-income workers with a long investment horizon that expect to be in a higher tax bracket in retirement. However, since assets in a Roth IRA are not subject to probate and can be passed on to heirs tax-free, wealthier investors may also benefit.
The Roth IRA didn’t exist before 1998, so if you’re already retired, chances are good that you may not even have one. But that doesn’t mean you can’t take advantage of the unique features of this kind of IRA. A backdoor conversion allows investors with traditional pretax IRAs to convert those funds to a Roth.
If you’re thinking of doing a Roth IRA conversion, here are a few things to consider:
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Your future tax rates.
If you think your tax rate will rise in the future, it may be worth it to convert your traditional IRA to a Roth IRA and pay those taxes upfront now.
When you’ll need to access these funds.
If you expect to live off your traditional IRA savings in the near term, then you may want to hold off on that Roth conversion.
Your beneficiary’s future tax rates, if applicable.
This is a bigger consideration for older retirees, but if the person you have named as your beneficiary for your IRA expects to be in a higher tax bracket in the future, you may want to consider converting your traditional IRA to a Roth IRA now. This way, the assets will be inherited tax-free.
Just keep in mind that you’ll have to foot the tax bill, so this is something that you’ll want to carefully consider before making any decisions. And if your beneficiary expects to be a in a lower tax bracket at the time of inheritance, then it may make more sense not to convert your traditional IRA instead.
In any event, the IRS requires those who are subject to RMD rules to first take the RMD before any amount of your traditional IRA can be converted to a Roth IRA.
Ready to convert? Sign up for a complimentary conversation with one of our financial advisors and let us walk you through the process.