Consider a Roth Conversion if You Are Worried about Retirement Taxes

Estimated reading time: 3 minutes(Last Updated On: December 23, 2020)

When you are investing in your retirement, it is important to put it somewhere that will help you save money in the long run. Many people are currently investing in Traditional IRAs where they invest their tax deferred money now and then pay taxes on the withdrawals when the time to retire comes. Another option that may be beneficial to consider, however, is the Roth IRA. Both options offer different benefits, but depending on a few personal factors, one may prove more beneficial to you than the other.

While Traditional IRAs relieve some financial burden more immediately by allowing tax-deferred contributions, taxes will still be collected upon distribution. For some people, this may not be the ideal situation as it’s harder to predict where you’ll stand financially when the time to retire does come. Not only that, traditional IRAs have a required minimum distribution once a certain age is reached. On the opposite end of things, Roth IRAs take taxes out when the contributions are made, and then they are distributed tax free. Roth IRAs also do not have a required minimum distribution age, which is a good way to generate familial wealth.

If you are looking to open a Roth IRA but you are already investing in a Traditional IRA, you can execute a Roth conversion without having to start a new account and start over. This way you can take advantage of the tax advantages a Roth IRA has. The rules and regulations behind conversions are still fairly open, so there are a lot of different ways to achieve whatever it is you’re looking to do. If you are considering a Roth conversion, it is important to make sure that you evaluate all the different factors that go into it so that you can confirm that making the conversion is what is best for you. Some of those factors might be the taxes, or other costs, and the duration of time that you’ll be investing your money.

There are three different ways to make the conversion to a Roth IRA. The first way is to complete a 60-day rollover. This is where you take out an amount from your Traditional IRA and move it directly to the Roth IRA by writing a check made payable to yourself. This must be done within 60 days, however, otherwise you’ll be penalized and the conversion will not be successful. (Click here to learn more about 401K to IRA rollovers.)

Another way is a trustee-to-trustee transfer. All you have to do with this is tell your Traditional IRA trustee to direct the money from your investment to your Roth IRA trustee and they should take care of the rest. The final way is a same trustee transfer. This is virtually the easiest way to make the conversion as the money stays within the same institution your trustee just moves it from one account to the other. If you decide to do a Roth conversion and you take the steps to accomplish it, all you have to do is sit back and enjoy the benefits of the change.

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