A 60-second read by Nicholas Scheibner: The main difference between a Traditional Individual Retirement Account (IRA) and a Roth IRA is that with a Roth IRA, you pay taxes upfront, so that when you are in retirement, you can make withdrawals tax-free.
If you are considering converting your IRA to a Roth, here are a few things to consider:
Taxes: If you convert money from a traditional IRA to a Roth, your tax rate for the year you convert could go up. If you decide to explore the conversion, please review with your accountant when to convert, as ideally, you would want to convert in a year that you expect your taxes to be lower.
RMDs: If you do decide to convert, this does provide a greater tax diversification to your overall portfolio, since you will potentially be reducing the required minimum distribution (RMD) amount from your IRA by converting IRA assets to Roth IRA assets.
The financial breakeven: The financial breakeven for a Roth is different for everyone, however, there are some general principles for the calculation – If tax rates increase in the future, this conversion may be worth more. If tax rates stay the same, or go lower, there may be less of a benefit. You may want to consider the opportunity cost of investing all monies today as opposed to using a portion for taxes. The longer you live the more you may benefit from having the Roth assets grow tax-free.
Please review this information with your accountant and consult with your financial planner prior to converting.
For any further questions, please reach out to your Baron team.