Should You Convert Your IRA to a Roth IRA?

If you are planning for your future, then you know that having enough money upon retirement is a top agenda item. It can be challenging to determine how much of your money you should put into an IRA vs. a Roth IRA vs. traditional investments vs. a 401(k) plan, especially if your place of business offers a matching opportunity for their plan. Even if a Roth IRA is not something you considered previously, take a moment to look at the details below. See how the value of a Roth IRA conversion may benefit your plan and help you in your preparation for retirement.

What is the Deal with a Traditional IRA?

A traditional IRA involves tax-deferred growth, as well as tax-deductible contributions you make until age 70.5. If you withdraw money from the account before age 59.5, you could face a penalty. This is a great plan, however, in certain circumstances, it is possible to have too much money in a traditional IRA account because of the required minimum distributions. What this means is that starting at age 70.5, on a traditional IRA you must withdraw annual sums of money from your account. The money you withdraw is subject to taxes, just as your current job income is subject to taxes. Depending on the amount you withdraw, your social security income might also face a higher tax percentage since your overall income could reach a higher tier.

What is So Great about a Roth IRA?

You can convert any dollar amount from a traditional IRA and/or a 401(k) to a Roth IRA. This retirement account involves tax-free growth, so you pay tax on the initial investment amount, but the withdrawal is subsequently tax-free. The key is to convert a partial amount over time, which you can discuss with a financial advisor. Once you have a Roth IRA account, you can keep adding to the account at any age, even beyond 70.5. You are only subject to a tax on the principal invetment amount. Unlike a traditional IRA, you will not be taxed on future withdrawals. As with a traditional IRA, you might have to pay a penalty on withdrawals of money from Roth IRAs that occur before you turn 59.5.

To highlight the differences between the two, let’s say you are a farmer, and you have to pay a tax. Would you prefer to pay a tax on the initial seed amount or pay a tax continuously on the future harvests the seeds yield? At first, it might seem challenging to pay for the seeds and the tax all up front. However, once you pay the tax on the initial seed, you have paid your debt to Uncle Sam. You can then enjoy the fruits of the harvest. If it is a plentiful harvest, then you can really enjoy the fruits. Some of the money can replace the original tax you paid, but then the rest is profit. Essentially, a Roth IRA taxes the seeds rather than the full harvest.

The Time Is Now

Based on the current administration’s decision to reduce marginal tax brackets for Americans of all income levels, now is the time to consider a Roth IRA conversion. Now refers to the next three to seven years, with sooner better than later. This is the lowest tax percentage you could see in the next 30 years or more. In 2026 and beyond, it is possible that middle income Americans could see tax percentages double. Because, with a Roth IRA, only the principal is taxed, it is ideal to pay the taxed amount while the tax percentages are at an all-time low. In the past, people might have felt put off by having to pay taxes on the principal amount, especially during a low-income period. If, in the future, the tax brackets increase, then you would not have to worry. With a traditional IRA, you would have to consider future tax percentages.

What Should You Do Now?

Whether all these financial terms make you feel confused or you have a firm grasp on the options but want a second opinion, then reach out to a financial advisor here at Wright Wealth Management Group. We can go over the pluses and minuses of each account type and why diversification is key, and discuss various strategies, given your age and income, for the best options for your investment.

Minimize Risk

You probably love to make money, but you do not want to lose that money. Losing money seems like something that happens to gamblers and other extreme risk takers. The risk does not seem appealing when it is associated with your nest egg—the money you intend to enjoy during your retirement years. While taxes keep the country supplied with roads, services for seniors, education, and more; you want to pay your fair share rather than too much. In particular, you do not want to take any more money than required out of your nest egg. A Roth IRA conversion during this low-tax period can help ensure that money is there when you need it.