Are you considering a Roth individual retirement account conversion? You’re not alone. In fact, data from Fidelity Investments shows a 44% year-over-year increase in the number of Roth conversions during the first quarter of 2024.
But before you make the decision to convert funds to a Roth IRA, there are a few key things to consider.First and foremost, it’s important to have sufficient assets outside of your retirement accounts to cover the upfront tax bill that comes with a Roth conversion. Additionally, you’ll need to weigh how the additional income during the year of the conversion could impact your eligibility for certain tax breaks.
Timing is also crucial when it comes to Roth conversions. Strategic conversions can significantly reduce lifetime taxes or help with legacy goals. For example, Roth conversions can be especially attractive during a stock market pullback, as you can convert more shares and benefit from tax-free growth on the rebound.
Furthermore, Roth conversions tend to be more popular during lower-income years, such as after a job layoff or early in retirement. And with Congress eliminating the stretch IRA, more investors are considering Roth conversions for legacy planning purposes.
For older investors, Roth conversions can help minimize the “tax time bomb” that comes with reaching the age of required minimum distributions (RMDs). Converting pretax retirement funds to a Roth account can provide tax diversification, possibly lower RMDs, and aid in inheritance planning.
Overall, Roth conversions can be a powerful tool in your retirement planning arsenal. By understanding the key considerations and strategic timing, you can make informed decisions to optimize your financial future. Stay tuned to Extreme Investor Network for more expert insights and tips on personal finance and investing.