Hi this is Dave Zaegel.
Today, let’s talk about Roth IRA conversions and how they can be tremendously beneficial to you for long-term planning.
First, what the heck’s a Roth IRA conversion? Most people have no idea what I’m even talking about when I say Roth IRA conversion.
What it is, is taking money from a traditional IRA and moving it over to a Roth IRA.
And what you do in that process is you pay taxes now, but you don’t pay any penalty for taking the money out of your traditional IRA.
So let’s back up a step.
When we put money into a traditional IRA, we are getting a tax deduction in the year we make the contribution.
But then when we take the money out in retirement, we pay tax on that.
So what we’re doing here is we’re saying, I’m going to go ahead and pay the tax now and convert it to a Roth IRA.
And a lot of people would say, “What the heck am I gonna…” Why am I gonna pay taxes now? “Why not just wait until as long as I can ” till I have to retire and then pay the tax?”
Well in today’s low tax-rate environment it might make some sense to pay the taxes now and then let the money grow, and grow, and grow in a Roth IRA, where we are not taxed on any distributions in retirement.
So keep that in mind. When the money’s in a Roth IRA, you do not pay taxes on distributions in retirement.
By moving the money from a traditional IRA now over to a Roth IRA, yes, we’re gonna pay taxes now, but it’s at relatively low tax rates historically.
And who knows what they’re going to be by the time we are retired and taking the money out.
This is a great way to help yourself long term, save money on taxes, by paying now while the rates are low and then not paying in retirement.
One word of caution is we typically want to convert this over time.
What does that mean?
That means we don’t want to, generally, take all of our money from a traditional IRA and shove it to a Roth IRA in one year.
There’s some situations where it might make sense.
If you lost a job, or didn’t have income for awhile, or if you own a business and you had a rough year, and you have some room to where you can absorb some extra income, that might make sense then to put all of the money into the Roth IRA and do that conversion in one year.
But typically, we want to move it in smaller pieces.
That way we don’t have one big tax hit in any one year.
We can absorb smaller tax hits and keep our tax rates low as we convert this over time.
Well I hope this helps give you an idea of how this can be tremendously beneficial by going ahead and paying the taxes earlier and letting the Roth IRA grow over time, especially while tax rates are relatively low.
If you need our help doing this, we’re happy to help.
If you just have questions, or thoughts, or comments, or anything else related to retirements or tax planning, just leave me a comment or just message me directly, and I’d be happy to help.
Thanks for watching.
