Prime earning years and the early years of retirement are ideal times to consider the option of converting a traditional IRA to a Roth IRA. Younger contributors to IRA accounts often want to do anything possible to defer paying taxes. Yet as the days approach for voluntary (after age 59 ½) or required minimum distributions (RMDs) at age 70 ½, planning a tax strategy takes on a greater sense of urgency. Consider converting your traditional IRA to a Roth IRA if you:
- Think that your future tax bracket will be the same or higher than it is today (Consider the effect of RMDs on future income.)
- Don’t plan on making withdrawals from your IRA for at least 5 years
- Have cash available to pay the taxes on the traditional IRA that you will convert
While no one knows how long he or she will live, life spans are increasingly longer. Therefore, continuing to develop tax strategies may have significant value after beginning retirement. Choosing to convert to a Roth IRA provides:
- Freedom to choose when to take IRA distributions. (Roth accounts are not subject to RMDs.)
- Tax-free income (after a 5 year holding period).
- Lower overall tax rate in retirement because taxes have been paid on the Roth fund distribution portion.
- Reduction of the 3.8% net investment income tax because Roth distributions are eliminated from the calculations of net investment income and modified adjusted gross income.
The conversion from traditional to Roth IRA is not always a simple, clear decision. A Salmon Sims Thomas tax advisor can help you project future income and tax consequences to determine if Roth conversion is right for you.