By Joshua Taffer, CEPA – Keplinger Report
The taxes you’re facing on your tax-deferred retirement savings don’t have to be so daunting. Check here to find out if you’re a candidate for a Roth conversion.
So you’re retiring and possibly facing a mountain of taxes on your hard-earned nest egg. A Roth conversion can be like switching to a tax-free tunnel, but it’s not for everyone. This guide outlines who should take the tunnel and not the mountain route.
Think of it like waiting until rush hour ends to pay the toll — strategic timing is key! By understanding the following factors, you can decide if a Roth conversion is for you.
1. Without a 401(k) or other tax-deferred account, it can’t happen.
Having a tax-deferred account, such as a traditional IRA, 401(k), 403(b) and more, is a fundamental element for someone considering a Roth conversion. These accounts offer benefits during your working years, allowing you to reduce your taxable income as you set aside funds for retirement. However, once you retire, the withdrawals from these accounts are taxed as ordinary income.
A Roth conversion involves moving funds from these tax-deferred accounts into a Roth IRA, which allows for tax-free growth and withdrawals. This foresight can result in significant tax savings, especially if tax rates rise or if one’s income in retirement pushes them into a similar or higher tax bracket.