Financial professionals have long debated the pros and cons, timing and how-tos of converting a traditional IRA into a Roth IRA.
Is it a good idea for you? Unfortunately, the short answer is, “It depends.” The longer answer involves predicting your income and income-tax bracket over many years — something that isn’t easy to do.
3 Questions to Assess Your Own Situation
You’d be wise to tap into the knowledge of your own tax and financial advisers, maybe even your estate attorney, to help you look at your personal situation. But you can start by asking yourself these questions:
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If, like most people I talk to, your answer to all three questions is yes, then now may very well be the right time to explore converting some of your traditional IRA dollars to a Roth. Because, thanks to the 2017 Tax Cuts and Jobs Act, taxes are on sale.
No matter what you think about these tax reforms and what the long-range consequences will be for the country, the fact is that many people will pay less in taxes this year and until at least 2025. All the marginal tax brackets have been lowered except for couples and singles in the $400,000 range. And standard deduction amounts have increased to $12,000 for individuals, $18,000 for heads of household and $24,000 for married couples filing jointly and surviving spouses.
Fill Up Your Tax ‘Buckets’
Which means it’s time to take another look at your nest egg and how it’s built around the three tax “buckets” with taxable, tax-deferred and tax-free investments and savings.
If you’re like many savers, your tax-deferred bucket has been filling up slowly but surely over the years, as you’ve contributed regularly to a 401(k), 403(b) or some other workplace plan. And that’s great — except, depending on your future income, you could face weighty tax bills in the future, when you start withdrawals. Meanwhile, your tax-free bucket — which holds Roth accounts, most municipal bonds and properly structured cash-value life insurance — is likely lacking.
By converting some of the money in your tax-deferred bucket to your tax-free bucket, you can even things up. Yes, you’ll pay taxes now on the money you move, but with today’s lower tax rates, the bite might not be nearly as bad as it could be later. And in exchange, your Roth will give you tax-free growth and withdrawals going forward.
Final Thoughts
Your advisers may have preached before about eventually diversifying across all three tax buckets, but with these recent tax reforms, the concept takes on a bit of urgency. There are no limits on how much money you can move to a Roth IRA each year, but with careful planning you can avoid bumping yourself into the next tax bracket as you convert those savings. (Retirees also will want to be mindful about what extra withdrawals could do to the cost of Medicare.)
As a member of Ed Slott’s Master Elite IRA Advisor Group, I’m always trying to help people create tax-efficient strategies with their retirement income savings. Looking at a Roth conversion now is just one more way to do that. Take some time, do the math and see if it fits with your plan.
Kim Franke-Folstad contributed to this article.
Securities offered through Kalos Capital Inc. and Investment Advisory Services offered through Kalos Management Inc. Retirement Income Strategies is not an affiliate or subsidiary of Kalos Capita, Inc. or Kalos Management Inc.
Individuals should consult with a qualified professional for guidance before making any purchasing decisions.
- Do you think, between now and your death, tax rates will go higher?
- Do you expect the value of your retirement accounts to increase?
- If you had the opportunity to pay taxes on your retirement savings at a lower rate right now, would you grab it?
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
-
Four Spa Retreats for Well-Heeled RetireesWe hand-picked these U.S. spa retreats for their serenity, amenities and dedication to the comfort of older travelers. All are located in the Continental U.S.
-
Four Military Benefits That Have Helped My FamilyMilitary life can be challenging for servicemembers and their families, but they're offered some significant financial benefits to help cushion the blow.
-
Why More Americans Are Redefining Retirement, Just Like I DidRetirement readiness requires more than just money. You have a lot of decisions to make about what kind of life you want to live and how to make it happen.
-
A Compelling Case for Why Property Investing Reigns Supreme, From a Real Estate Investing ProInvestment data show real estate's superior risk-adjusted returns and unprecedented tax advantages through strategies like 1031 exchanges and opportunity zones.
-
Are You Retired? Here's How to Drop the Guilt and Spend Your Nest EggTransitioning from a lifetime of diligent saving to enjoying your wealth in retirement tends to be riddled with guilt, but it doesn't have to be that way.
-
Separating the Pros From the Pretenders: This Is How to Tell if You Have a Great AdviserDo you leave meetings with your financial adviser feeling as though you've been bulldozed into decisions or you're unsure of what you're paying for?
-
Five Downsides of Dividend Investing for Retirees, From a Financial PlannerCan you rely on dividend-paying stocks for retirement income? You'd have to be extremely wealthy — and even then, the downsides could be considerable.
-
I'm a CPA: Control These Three Levers to Keep Your Retirement on TrackThink of investing in terms of time, savings and risk. By carefully monitoring all three, you'll keep your retirement plans heading in the right direction.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
