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

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

238 Portage Ave, 3rd Floor

Winnipeg, Manitoba R3C 0B1

26 Wellington Street East, Suite 700

Toronto, Ontario M5E 1S2

  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.

iA Private Wealth is a member of IIROC and the Canadian Investor Protection Fund. iA Private Wealth (USA) Inc. is a registered investment adviser with the SEC. This platform is solely for informational purposes. Investing involves risk and possible loss of principal capital. Comments by viewers or third-party rankings and recognitions are no guarantee of future investment outcomes and do not ensure that a viewer will experience a higher level of performance or results. Public comments posted on this site are not selected, amended, deleted, or sorted in any way. If applicable, certain editing of personal identifiable information and misinformation may be deleted. Adviser believes that the content provided by third parties and/or linked content is reasonably reliable and does not contain untrue statements of material fact, or misleading information. This content may be dated. Please visit the following page for further disclosures related to iA Private Wealth (USA) Inc.: www.iaprivatewealthusa.com

Comments

Post a Comment

Popular posts from this blog

Don’t Retire Blind! The Ultimate Guide to Estimating Your US Cost of Living!

Image
Don’t Retire Blind! The Ultimate Guide to Estimating Your US Cost of Living! In planning for your retirement, it’s crucial to have a good handle on the potential cost of living.  Without a clear understanding of these expenses, there’s a risk of either outlasting your savings or compromising your lifestyle.  Calculating your retirement cost of living can be a bit tougher than you thought,  so you may want to consider seeking guidance from an investment advisor portfolio manager.  They can assist you in figuring out what elements to include in your retirement budget, helping to ensure a more effective and secure financial plan for the future. Want To See Me In Action? THERE IS NOTHING LIKE VIDEO! SUBSCRIBE TO ME ON YOUTUBE TODAY! Retirement Spending Risks There are numerous risks that have the potential to increase your expenses and jeopardize your financial stability in retirement.  Here are seven common risks that you need to be vigilant about: Healthcare Costs...
Read more

The Ultimate Cheat Sheet for Small Business Tax Breaks!

Image
The Ultimate Cheat Sheet for Small Business Tax Breaks! Your Really Cool List For Small Business Tax Savings! Although taxes are inevitable, there is a possibility to reduce them. Fortunately, numerous small business tax deductions exist to assist in decreasing your taxable income. I’ve compiled a list of potential small business tax write-offs that could benefit your financial strategy. However, I’m NOT a Tax Professional… This list is just a quick guide to help you get started with potential small business tax write-offs.   But remember, it’s not professional tax advice.  For accurate advice that fits your business, talk to a tax pro. Use this list as a starting point,  but don’t forget to consult with a pro for the real deal . It’s crucial to recognize that while this list provides valuable insights,  I strongly advise seeking guidance from a qualified tax professional to ensure accurate and compliant expense reporting.  Tax regulations can be intricate,...
Read more

Unveiling the Ultimate Money Move: Crush Debt or Retire Rich — What’s YOUR Play?

Image
Unveiling the Ultimate Money Move: Crush Debt or Retire Rich — What’s YOUR Play? Escape Debt or Secure Your Dream Retirement — Which Path Leads to Riches? To Save, Or To Crush Debt..That Is The Question! Should you focus on paying off your debt or saving for retirement?  Many people grapple with this question regularly.  Let’s break down this important decision for a clearer understanding. Come Check Me Out IN VIDEO! YOUTUBE IS SUPER COOL! SUBSCRIBE TODAY! TFSA TAXED! CRA HAMMERS Trader For Taxes IN HIS TFSA! Audrey Smith, a 50-year-old with two teenage sons, is currently managing a  substantial mortgage and contending with significant expenses like most people today.  A recent trip to Brazil that she financed on her credit card, has added to her overall debt load. Amidst these immediate financial challenges,  Audrey is also mindful of the looming specter of retirement. While Audrey enjoys her current job,  she acknowledges that retirement planning has not ...
Read more