ROTH IRA Conversions Are Surging. Why?

ROTH IRA Conversions Are Surging. Why?

Source: Money Magazine June 2020

Fidelity Investments saw a 76% increase in the number of Roth IRA conversions in the first quarter of 2020.

Why is a Roth better than a traditional IRA?

1)    No taxes due when withdrawing in future.

2)   No required minimum distributions at age 72.

The pain point is that when you convert a traditional IRA to a Roth, you pay income tax on the amount converted.

When is it smart to convert to a Roth?

1)      If you believe you’ll be making more money in the future or will have large future required minimum distributions at age 72 (pushing you into a higher tax bracket), it might be a smart move for you to convert.

2)     If you think tax rates will rise in the future due to large government debt and social security then a Roth conversion now could be a beneficial strategy.

 Starting ROTH conversions now or at retirement could save you money. Software can model different what if scenarios of tax savings planning.

Watch Outs:

A caveat: if you don’t have the cash on hand to pay the taxes on the conversion outside of your IRA, it usually isn’t advisable to convert.

You don’t have to convert an entire IRA – just switch a portion that will not push you into a higher tax bracket.