When thinking about having to paying taxes on retirement savings, should you be paying them earlier in life or later? There are numerous questions just like this that you will need to ask yourself prior to deciding whether or not a Roth conversion is right for you and your financial future. In this article, we are going to go over some of the most important questions that will help guide you in making this decision. Keep reading to learn if a Roth conversion is right for you!
First, you will need to ask yourself if you will need the distributions from your retirement account. If you do need them, do you expect to be subject to lower income tax rates during your retirement? If yes, a Roth conversion might not be best for you. If you do not expect your income tax rates to be lower, do you have reserved cash outside of your account to pay taxes once you convert? If no, and you use your retirement funds to pay your taxes, a Roth conversion is advantageous but not as valuable. It could still benefit you in the long run, though, if you have a long-time horizon to enjoy tax-free growth, and after you die, your income tax-free distributions will be advantageous to your beneficiaries.
If you do have cash outside of your retirement accounts to pay income taxes upon conversion, a Roth conversion is definitely something you should consider, as the Roth IRA will not be subject to RMDs, and it can allow your account to grow tax-free.
If you will not need the distributions from your retirement account, you will want to ask yourself if the beneficiaries on your account are qualified charitable organizations. If they are, a Roth conversion doesn’t offer much advantage to you, nor your beneficiaries. If your beneficiaries are not qualified charitable organizations, do you expect your beneficiaries to be subject to high income tax rates in the future? If the answer is no, and your beneficiaries are in low tax brackets, the cost of conversion may not be justified enough. If the answer is yes, you will need to ask yourself if you have cash outside of your retirement accounts to pay the income taxes upon conversion, as mentioned above.
As you can see, there are numerous questions to ask before considering a Roth conversion. The benefits of a Roth conversion can be rewarding if you are eligible and if you thoroughly consider the pros and cons for yourself in retirement and your beneficiaries once you pass away. Visit our helpful guide here to start asking yourself questions like these regarding whether or not converting to a Roth account is right for yourself and your financial future.
Three Bridges Planning is here to help any questions you might have. Feel free to reach out to us by phone or email. We can be reached at (321) 225-3154 and hello@threebridgesplanning.com