Guide: How Do I Convert my IRA & 401K Accounts to Roth?
Do you feel you have taken the steps to ensure your financial future, having an IRA and/or a 401(k) account? Do the new tax laws throws a wrench into your plan, making the conversion to a Roth IRA seem beneficial? You may think the Roth IRA sounds like a viable option, but you have a variety of questions. Should you convert all your money to a Roth IRA account? What are the steps, benefits, and drawbacks to the conversion process? Is this the right move for my portfolio considering my investments and my age?
What Is the Problem with Conversion?When you switch from a traditional IRA or 401(k) to a Roth IRA, the actual process is relatively easy, the process involves some paperwork and some signatures. You can conveniently convert any account and any amount, even one dollar, over to a Roth IRA. The major problem barreling down in the form of a tax bill —how much you pay and when. Essentially, you have to pay taxes on the principal amount you are converting, as they were initially pre-tax investments. These taxes could pose a roadblock if you are experiencing a lull in steady employment, have a pile of bills and debt to pay, or another variation of a financial hiccup.
Overcoming the Problem for the Greater Financial GoodRight now, the tax rates are low for all income levels, based on the current administration’s new tax laws. Therefore, a window of opportunity exists for you to take advantage of the lower taxes on your conversion amount. Below are a few additional strategies that may help make the conversion tax more feasible for your financial situation.
- Remember the old cliché about the value of moderation? This cliché’ is applicable here. You can spread the amount you want to convert over a period of time. Because the converted amount is added to your annual income amount, or gross adjusted income, you want to convert a sum that allows you to maintain your tax bracket. If you move to the higher tax bracket tier, you will be subjected to a higher tax rate. Depending on how much money you want to convert and where you stand within the tax bracket, you may have to convert money for quite a few years. However, with the new tax laws in place, you can expect lower tax percentages for at least another three to seven years. Therefore, you can find lower tax rates at all income levels. Looking past that beginning in roughly 2026, financial advisors predict an increase, even a doubling, of tax rates.
- To minimize the tax impact, you can also consider a tax-deductible donation to a public charity. The deduction you receive could be as much as 60% of your adjusted gross income. Remember that this amount could increase in the future when tax rates are higher.