There are many ways to invest your wealth throughout your life that can set you up for a successful retirement. IRAs, Roth IRAs, and 401(k)s are just a few of the most popular retirement accounts.
What if you already have a traditional IRA, however, and want to contribute that money to a different account based on your current financial situation and retirement plan? Well, converting to a Roth IRA could be an option for you.
What is a Roth IRA Conversion?
A Roth IRA is a popular alternative to a traditional IRA. In a traditional IRA, one contributes pre- or after-tax dollars and is taxed on the money once a withdrawal is made. For a Roth IRA, one contributes after-tax dollars and enjoys tax-free withdrawals after the age of 59 ½ and the funds are held in the Roth IRA for at least five years.
While a Roth IRA does come with contribution limits on its own, you can convert a traditional IRA into a Roth IRA. This is a process known as a “Roth IRA conversion.”
By converting a traditional IRA into a Roth IRA, the retiree will still owe taxes on any money in the traditional IRA that’s being converted but will be able to make tax-free withdrawals from the Roth IRA account when the time comes.
What are the benefits of a Roth IRA conversion?
A Roth IRA conversion might make sense for you if you expect to be in a higher tax bracket upon retirement. This way, you pay taxes on the conversion at the current tax rate but are able to limit tax penalties once you make a withdrawal.
Additionally, Roth IRAs are free from Required Minimum Distributions (RMDs), which are required withdrawal amounts a retiree must make from a retirement account after a certain age.
What a Roth IRA conversion ultimately comes down to is paying taxes with the current known tax rates that could be lower than in the future. Tax rates are scheduled to go up on January 1, 2026 if no changes are made to current tax law. So, you’ll pay taxes on your contributions now and not when you withdraw, which could leave you more money with which to retire.
What are next steps?
Whether you’re early in your investing journey or nearing retirement age, there is a lot to consider when it comes to your financial future. Retirement planning can be a complex process, but educating yourself is often your best asset. Plus, you don’t have to take it on alone—a financial advisor can help.
Not sure about where you stand financially? Take FSA’s Free Retirement Quiz to see how prepared you are for retirement, where you may need to adjust your plan and what steps to take next.
Have questions about your Roth IRA or other retirement plan? Schedule a no obligation consultation with one of our trusted financial advisors to learn more and get you on a path toward retirement.
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Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.
Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. 3215726-11/23