Why a Roth IRA Conversion Could Be Your Ultimate Money Move!

Unleashing the Power of Roth IRA Conversion: Incredible Benefits and Shocking Drawbacks You Must Know!

Have you thought about converting a pre-tax retirement account into a Roth account as you near retirement?

Converting pre-tax retirement accounts, such as IRAs, into after-tax Roth IRAs can offer the advantage of continued tax-free growth and tax-free withdrawals during retirement.

Determining if this is the right retirement savings strategy for you may benefit from a discussion with a financial advisor.

Studies indicate that individuals collaborating with a financial advisor tend to feel more secure about their financial situation and could potentially accumulate roughly 15% more savings for retirement. According to a 2022 Northwestern Mutual study, a significant 62% of American adults recognize the need for better financial planning. Surprisingly, only 35% of Americans currently engage with a financial advisor.

Fundamentals of Roth IRA conversion

Unlike other types of IRAs, a Roth IRA is funded with after-tax dollars. This means you pay taxes on the money before contributing to the Roth, and you can’t claim deductions for these contributions on your taxable income.

However, the beauty of a Roth lies in its tax-free growth. The funds in a Roth IRA accumulate without being taxed, and upon retirement, you can withdraw these funds without facing taxation.

It’s possible to convert funds from pre-tax IRA accounts — such as traditional IRAs, SEP IRAs, and Simple IRAs — into a Roth IRA.

During a conversion from a pre-tax IRA to a Roth IRA, you’ll need to pay taxes on the converted amount at your current tax rate. The converted sum is treated as regular income, potentially pushing you into a higher tax bracket and resulting in a larger tax bill for the year of the conversion.

Is a Roth IRA Conversion a Smart Move for You?

Despite the immediate tax implications, a Roth IRA conversion offers distinct advantages that could make it a valuable strategy.

One significant benefit is its ability to bypass income caps limiting Roth contributions for higher-income individuals. While most taxpayers can contribute up to $6,500 ($7,500 if aged 50 or above), these limits decrease for higher earners and eventually over certain income thresholds, no Roth contributions are permitted.

However, conversions have no such limits. Individuals with pre-tax IRAs can convert any amount of funds to a Roth IRA in a given year.

Another advantage is the exemption of Roth IRAs from required minimum distributions (RMDs). RMDs, mandatory withdrawals from retirement accounts beginning at age 73, can create tax obligations for affluent retirees. Roth IRA owners, though, are not compelled to take RMDs during their lifetime, making these accounts particularly beneficial for leaving inheritances.

Nevertheless, it’s crucial to evaluate your specific circumstances and how a Roth conversion might impact your retirement. That’s why seeking advice from a fiduciary financial advisor is vital before making this decision.

Potential Drawbacks of IRA Conversions

The most significant drawback of a Roth conversion is the immediate potentially large tax burden payable today. The requirement to pay a substantial amount of taxes upfront acts as a major disincentive for many contemplating this conversion.

Additionally, Roth accounts must be open for at least five years to avoid taxes on withdrawals. Although withdrawals after age 59.5 aren’t subject to a 10% penalty, income taxes on these withdrawals still apply.

Roth IRA conversions might not suit every saver. Retirees with lower incomes than during their working years might find it more advantageous to stick with a regular IRA and pay taxes upon withdrawal.

Furthermore, it’s crucial to note that once you convert a regular IRA to a Roth IRA, there’s no turning back. Individuals uncertain about whether their post-retirement income taxes will be lower than their current rates should carefully reconsider a conversion

Before proceeding with a Roth conversion, a thorough assessment of your financial and tax circumstances is crucial. Consulting with a financial advisor can provide invaluable guidance in making this decision.

Have Questions? Contact us

We’ve assisted our clients through every stage of life. Even when you’re not aware that something might impact your financial future, it likely will to some extent. Engaging in a conversation with your investment advisor about any financial changes is an excellent approach to keeping your financial goals in focus.

For more information or to connect with me, you can reach out via email at macekadmin@iaprivatewealth.ca or get to know me better by exploring my engaging video content on YouTube https://www.youtube.com/@joemacek.

I share valuable insights and discussions on financial planning, market commentary, and investing concepts that can further enrich your understanding. Join me on my channel to discover more!

Don’t hesitate to reach out today at 1–888–324–4259 to discover more about how we can help you achieve your investment milestones.

Joe A. Macek, FMA, CIM, DMS, FCSI

Investment Advisor, Portfolio Manager

iA Private Wealth | iA Private Wealth USA

Toll Free North America: 1–888–324–4259

Email: macekadmin@iaprivatewealth.ca

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1. “Planning and Progress”, Northwestern Mutual (2022)
2. “Journal of Retirement Study” (Winter 2020). The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the Journal of Retirement study.

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