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Roth IRA conversion- action today for a better future

Roth IRA conversion- action today for a better future

April 09, 2020
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Posted in collaboration by Chuck Rose, CIMA®, CFP® & Kaysian Gordon, MBA, CFP®, CPA on Thu, 04/09/2020

A Roth Conversion, simply defined, is taking some, or all, of your pretax retirement savings and transferring to a Roth IRA account. To recap, a Roth IRA, is a qualified retirement account where you have previously paid the taxes on the contributions, investments grow tax deferred and qualified withdrawals starting at 59 ½ are tax free. In a ROTH account you also do not have to take a mandatory withdrawal (RMD) at age 72. This allows your investments to potentially continue to grow more over time.


If you implement a conversion of an existing pretax retirement account into a Roth IRA, you would pay the taxes today. The Roth would grow tax deferred, but again the big difference is that your withdrawals in retirement will be tax free if taken appropriately. Roth conversions may be a strategy to consider if you have retirement accounts at previous employers, old accounts that are inactive, or even considering a systematic plan over a number of years to slowly convert a portion of your retirement savings to Roth for the benefits of tax diversification.  There are many considerations and rules, so we urge you work with your professionals based on your specific situation.


There are three reasons to especially consider doing a Roth Conversion during a market downturn.


Make it part of your long-term plan

By paying the tax costs of conversion today, if you can afford to do so, may be worth it if you are dedicated to a plan to increase your Roth savings over the next several years. This gives you tax diversification in your retirement years.


Conversions cost you less in market downturns

We suggest considering increasing your Roth savings on its own merit. But conversions at a time of market downturn can “cost” you less by way of the tax you need to pay, when the market is trading lower and account balances are smaller before a correction.


Taking action is a good habit

In times of crisis, it is hard to know what to do. But taking some type of positive action no matter how small can wire you for success over the long term. Whether or not you and your professional team come to a conclusion if increasing Roth contributions is appropriate for you, there may be other small actions to take that give you the feeling of progress and contribute to your long term success.


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Photo by Markus Spiske on Unsplash