As stocks have taken a dip in 2022, with potential for the market to become a bear market, this may be a good time to consider converting retirement assets to a Roth IRA. Transferring funds from a traditional IRA or 401 (k) plan into a Roth account can be beneficial over the long-term because the assets grow tax-free in a Roth account, whereas in a traditional account an investor owes the taxes at distribution time.
When the market takes a dip, your shares aren’t worth as much, which creates an opportunity to convert them to your Roth IRA for less tax. Then, as the market recovers, your shares will experience tax-free growth.
Another strategy with converting retirement assets to a Roth is to time the conversion when your taxable income is lower than usual. Since the money converted to a Roth will be subject to tax at ordinary rates, you should consider using up the lower tax brackets when you have lower than expected income for the year.
Converting your retirement accounts to a Roth IRA also protects against future tax increases. Unless Congress votes to extend The Tax Cuts and Jobs Act, rates will revert back after 2025 to what they were in 2017. That means, for instance, that the 12% tax rate would go back up to 15%, the 22% tax rate would revert back to 25%, and the 24% tax rate would return to 28%.
Another strategy with converting retirement assets to a Roth is to time the conversion when your taxable income is lower than usual. Since the money converted to a Roth will be subject to tax at ordinary rates, you should consider using up the lower tax brackets when you have lower than expected income for the year.
Converting your retirement accounts to a Roth IRA also protects against future tax increases. Unless Congress votes to extend The Tax Cuts and Jobs Act, rates will revert back after 2025 to what they were in 2017. That means, for instance, that the 12% tax rate would go back up to 15%, the 22% tax rate would revert back to 25%, and the 24% tax rate would return to 28%.
It is also important to note that the deadline for Roth IRA conversion is December 31. Conversions that occur within the calendar year affect that years taxes.
It is important to keep in mind that if you convert a large balance, the taxes could be substantial, and it’s important to manage tax brackets appropriately to ensure you aren’t paying more to the IRS than necessary. Please reach out to us for a tax projection before making any conversions to see how a Roth IRA conversion will affect your taxes.
It is important to keep in mind that if you convert a large balance, the taxes could be substantial, and it’s important to manage tax brackets appropriately to ensure you aren’t paying more to the IRS than necessary. Please reach out to us for a tax projection before making any conversions to see how a Roth IRA conversion will affect your taxes.