Convert To A Roth IRA Now To Avoid Higher Taxes Later?
Published Wednesday, January 18, 2017 at: 7:00 AM EST
Should you convert your traditional IRA to a Roth IRA? A key factor in this decision is taxes. If you expect to be in a higher tax bracket during retirement than you are now, a conversion may make perfect sense. But if you anticipate being in a lower tax bracket then, you could decide to sit tight.
With a traditional IRA, contributions may be wholly or partially deductible, but distributions generally are taxed at ordinary income rates. You never can deduct Roth contributions, but payouts from a Roth after five years are tax-free if you've reached age 59½ by then. The trick is to figure out whether the promise of future tax-free distributions is worth the current tax price on a conversion. The amount you convert will be treated as a distribution and taxed at your rate for ordinary income.
As you weigh your options, don't overlook the favorable tax rates for joint filers. For instance, a taxable income of $200,000 puts you in the 33% bracket as a single filer, but if you're married, that same income level puts you in only the 28% bracket as a joint filer. Remember, though, that if one spouse is significantly older than the other or in ill health, a surviving spouse may end up paying higher tax in retirement as a single filer. Similarly, an inheritance could push you into a higher bracket at that point.
Consider the tax variables carefully. They could create an incentive to convert to a Roth before your golden years.
© 2020 Advisor Products Inc. All Rights Reserved.
- Federal Estate Tax Reduced, But What About State Taxes?
- Tax Rules For Collectible Donations
- 5 'Other' Retirement Saving Ideas
- New Opportunity For Stand-Alone HRAs
- Online Survey Shows Split In Funding Home Down Payment
- IRS Applies IRA Rollover Limit To Coverdell ESAs
- Swap Munis To Your Tax Advantage
- This Type Of Trust Is A Failure
- What Are The Main Items On Trump's Tax Reform Agenda?
- Set Aside The Funds You Might Need For A Rainy Day
- Why Would You Take Your RMDs Sooner?
- Tax Rewards For Charitable Trusts
- Retiring Abroad? Be Ready To Take The Bad With The Good
- Tune Into The Tax Break For NUA
- Tax Rewards For Year-End Generosity