You take the retirement money you currently have in traditional IRAs and move them to a Roth IRA. Given the way the Dow Jones Industrial Average
and the S&P 500 index
have plunged by about a third in recent weeks, your retirement account is worth much less than it once was. It also means that your tax bill for a conversion will be lower than the market a few weeks ago.
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But before deciding to do a Roth conversion, consider these three questions.
1. Do you have money to pay taxes now?
How much money do you really have? Remember that you will have to pay taxes during this move. As the coronavirus pandemic closes and is expected to cost their jobs millions of dollars, even temporarily, allow yourself a lot of leeway before you part with your money for Roth conversion taxes.
Without the money to pay these taxes, you are taking the money from an underperforming investment to pay this year’s taxes. But the ripple effect is even more important. There will be even less equity to build in the long term. Also, using IRA funds to pay taxes now will not only reduce your retirement funds but will count as a taxable withdrawal for 2020. This results in more income taxes and possibly a penalty if you are no more than 59 and a half this year.
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2. Do you have a Roth option by work?
Many companies have an option designated Roth 401 (k) for retirement funds subject to the same rules as a traditional 401 (k). Additionally, anyone with earned income can contribute to a Roth IRA within certain income limits. Your best strategy may be to start making ongoing contributions to your Roth option at work or to a Roth IRA now. When you retire, you will have the choice between several investments to make your retirement withdrawals without making any conversion.
Now that the age to take RMD on your IRA has risen to 72 years, instead of 70 ½, the tax impact of these payments may be lower. This can have an impact on your decision making process more than what the stock market is currently doing.
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3. What do you think your tax rate will be, now and in the future?
An advantage of a Roth IRA is that when the money comes out, no income tax will be due because the taxes have already been paid. When you withdraw money from IRAs and traditional pension plans, you pay taxes at your marginal income tax rate because the money that was paid into your IRA was income before taxes were paid. are collected.
Your income tax for this year is based on income, so you can calculate this rate since you can predict your income – or at least you could before the coronavirus pandemic. What a Roth conversion requires is also knowing (or guessing) your retirement tax rate. The more time you have before retirement, the more you don’t know.
If you are currently working and you are in the 24% tax bracket, the current deduction for money you hide can be a great annual tax savings and hard to lose. However, if you have large assets on which you will pay deferred taxes in retirement, this may be the time to make a change with the declining market.
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Here are some key facts to know about Roth conversions:
• Monitoring is important – 60 days is the limit between withdrawing money from your IRA and depositing in a Roth IRA.
• Opening a new Roth IRA account is a necessity. There is no need to change investment companies.
• Consult the IRS rules here.
• Be sure of this decision as it cannot be reversed. The 2017 Tax Reduction and Jobs Act closed a loophole that allowed people to reverse their decision.
Remember, switching to a Roth is about your future withdrawals. Switching from a traditional IRA to a Roth will not improve the return on your investment; you can change your investments at any time in your accounts.
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Whether to change or not is a deeply personal and specific issue to consider.
In these times of stress and financial ambiguity, we all want to act. The best time to analyze and decide is from a clear place of understanding. If you need help sorting out the details of your finances, now may be the time to find your own licensed financial planner to guide you. This Chartered Financial Planner Standards Council website can help you find one in your area.
CD Moriarty, CFP is a Vermont-based speaker, writer and financial coach who wants to create financial peace of mind for others. She can be reached through her website at www.MoneyPeace.com.