As you approach retirement, you’re likely looking for ways to reduce your expenses and maximize your income any way you can. You may be considering downsizing, delaying Social Security or even working part time in retirement to improve your financial stability.
There’s one other strategy you may want to consider, especially if you have a sizable amount of money in a traditional IRA. It’s something called a Roth conversion, which is basically the process of transitioning traditional IRA funds into a Roth IRA.
There are a few things to consider before you initiate a conversion. One is that you will have to pay taxes on all growth and deductible contributions that are converted from the traditional into the Roth. If you don’t have the funds available to pay that tax bill, a conversion may not be right for you.
Another point is that you can’t take advantage of the Roth IRA’s tax-free withdrawal status unless the Roth has been open for at least five years. If you need income from your IRA funds within five years, a conversion may not be the right strategy.
If you can overcome those two obstacles, however, you may want to consider a Roth conversion. Below are three reasons why it might be right for your retirement:
It reduces your tax obligation.
The biggest difference between a traditional IRA and a Roth IRA is the way the two accounts are taxed. With a traditional IRA, all withdrawals are taxed as ordinary income. In a Roth IRA, withdrawals are tax-free.
This could have big implications in your retirement. The first and most obvious is that you will pay less in taxes with a Roth than you will with a traditional IRA. However, you will also have less taxable income, which impacts other things, such as the tax rate on your Social Security benefits or the premiums you pay for Medicare. Analyze your projected income in retirement to see how a Roth could change the picture.
You aren’t forced to take withdrawals.
Traditional IRAs have something called required minimum distributions, or RMDs. These are mandatory distributions that start at age 70½. The required withdrawal rate usually increases as you get older. If you live well past 70½, it’s possible that RMDs could deplete your IRA.
With a Roth IRA, there are no RMDs. You can keep your funds invested in the Roth as long as you like, allowing them to grow on a tax-free basis. If you have plenty of income and your goal is to leave your wealth to your loved ones, a Roth IRA may be a better option.
You eliminate tax obligations for your beneficiaries.
The Roth IRA doesn’t just generate tax-free withdrawals for you. The Roth death benefit for your loved ones is also tax-free. When you pass away, they simply fill out a beneficiary claim form and receive their death benefit. They don’t pay any taxes, and the windfall doesn’t increase their tax rate. If you’re looking to maximize your legacy and simplify the process for your heirs, you may want to consider a Roth.
Considering a Roth conversion? Contact Hal Hammond in Sarasota. Hammond Asset Management is happy to help you analyze your needs and goals and determine the best strategy for you. Let’s connect today and start the conversation.
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