Tax Blog

Pros and Cons of Converting Your Traditional IRA to a Roth IRA

The market of the United States has been recently volatile. While it is hard to pin point an exact cause, the effect is still the same. One week, the market is booming. But the next week, the market is down. The volatility has led some taxpayers to consider converting their traditional individual retirement arrangement (IRA) to a Roth IRA.

There are numerous advantages to the Roth IRA. First, there is no required minimum distribution rule. Secondly, you can keep contributing to the Roth IRA after age 70 ½ as long as the income guidelines are met. Finally, distributions from a Roth IRA are tax free.

However, as you can see from the title there are some disadvantages to the Roth IRA. The biggest downside of converting to a Roth IRA is that tax must be paid on the traditional IRA money that was tax deferred. However, this is where the volatile market can come into play. A downturn in the market means that since the value of your traditional IRA has dropped, you won’t pay as much tax on the converted amount.

If you’re planning on converting, here are some additional tips to help minimize your tax burden. First, stagger the conversion across different years. Secondly, use taxable money to pay taxes that are owed. Finally, if you don’t have enough savings to pay your taxes, think about taking a tax-free withdrawal from a pre-existing Roth IRA if you’re eligible to withdraw without penalties.

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