Should You Convert Your IRA to a Roth?

TL;DR

Converting from a traditional to a Roth IRA can provide tax benefits and diversification in retirement planning.

Transcript

Gaby Lapera: Remember 18 year-old me? I had accidentally opened a traditional IRA. Now I have a Roth IRA with those same funds that I originally opened. And that was a whole heap of a mess, let me tell you, because I opened my IRA right before Bank of America purchased Merrill Lynch. And Merrill Lynch runs all of Bank of America's IRAs. So my IRA f... Read More

Key Insights

• 📁 Converting from a traditional to a Roth IRA can help individuals access Roth IRA benefits if they are unable to make direct contributions.
• ❓ The conversion process requires paying taxes on the amount being converted.
• 🚕 Converting during a period of temporary loss of income can minimize tax payments and allow for future tax-free growth.

Questions & Answers

Q: Can you convert from a Roth IRA back to a traditional IRA?

No, the conversion only goes from a traditional IRA to a Roth IRA. There is a one-time undo provision, but typically, once you have a Roth IRA, it is recommended to keep it due to tax-free earnings.

Q: What are the tax consequences of converting a traditional IRA to a Roth IRA?

When you convert, you have to include the converted amount as taxable income for the year. This means you will need to pay taxes on the converted amount when filing your tax return.

Q: When is a good time to consider converting from a traditional to a Roth IRA?

Converting during a temporary loss of income or when you have low taxable income can be beneficial. You can potentially convert without paying any income tax or only a small amount, allowing for tax-free growth in the future.

Q: How does a Roth IRA help control taxable income in retirement?

A Roth IRA can be useful in retirement planning, as withdrawals from a traditional IRA are mandatory after age 70.5 and treated as taxable income. By converting to a Roth IRA earlier in your career, you can control and minimize your taxable income in retirement.

Summary & Key Takeaways

• Gaby Lapera shares her personal experience of converting her traditional IRA to a Roth IRA due to the acquisition of Merrill Lynch by Bank of America, which caused access issues.

• Dan Caplinger explains that the conversion only goes from a traditional IRA to a Roth IRA, and once converted, it is beneficial to keep the Roth IRA due to tax-free earnings.

• Converting from a traditional to a Roth IRA can be advantageous for individuals who are unable to make direct Roth IRA contributions or want to control their taxable income in retirement.