Since it’s inception in 1974, the IRA has become one of the most popular retirement savings vehicles. In fact, there are more than 25 million IRAs in existence today.1 Many of those are traditional IRAs, which are popular because they offer a current tax deduction for contributions and tax-deferred growth while funds remain in the account.
However, the Roth IRA has also grown in popularity in recent years. It shares many similarities with the traditional IRA, but also has a few important differences. Because of those distinctions, many people now prefer to use a Roth instead of a traditional IRA. In 2013, Roth contributions exceeded traditional IRA contributions by more than $1 billion.1
What if you would prefer a Roth but already have a sizable balance in a traditional IRA? Fortunately, you can do something called a Roth conversion. It’s the process of converting traditional IRA funds into a Roth IRA. It’s not for everyone, but it can be an effective strategy for some retirees. Here are three reasons why you may want to consider a Roth conversion:
In a traditional IRA, you get tax-deferred growth while the funds are in the account and potential deductions for all contributions to the account. However, your traditional IRA distributions are taxable. That could pose a problem as it may increase your tax expense in retirement.
The Roth IRA also offers tax-deferred growth, but no upfront deductions. Instead, you are able to withdraw income from a Roth tax-free as long as the account has been open five years and you are either disabled or age 59 ½ or older. That means you can use a Roth to generate tax-free income in retirement.
When you do a conversion, you don’t avoid the taxes due on the traditional IRA. You simply pay the taxes for the amount that is being converted. That could create a sizable current-year tax bill, but it could be worth it in exchange for tax-free income in the future. That’s especially true if you will allow the new Roth to grow and accumulate before you start taking distributions.
No Required Distributions
In a traditional IRA, you are required to start taking distributions at age 70 ½. Many retirees take distributions earlier than that age as they need the funds to support their lifestyle. However, others don’t want the distributions. They would rather keep the funds available for costs they face later in life, or they want to maintain the funds as a legacy asset for their kids.
A Roth IRA has no mandatory distributions. You can leave the funds in the Roth as long as you like, allowing them to indefinitely grow on a tax-deferred basis. If you don’t need distributions at age 70 ½, you may want to consider converting to a Roth IRA.
Tax-Free Legacy Distributions
You’re not the only one who will benefit from tax-free distributions from your Roth IRA. Your beneficiaries will also be able to receive their share of the funds tax-free after you pass away. They may be able to take the funds in a lump sum or create a lifelong income stream for themselves. Either way, the distributions aren’t taxable.
Curious about whether a Roth conversion could be right for you? Let’s talk about it. Contact us today at Trinity Financial. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
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