With financial markets still in a bit of a slump, now might be a good time to convert to a Roth IRA, which can have attractive advantages.
Why trade in your traditional IRA?
A Roth IRA can be tapped tax-free in retirement, and unlike your 401(k) or a traditional IRA, there are no required distributions beginning at age 70 1/2. This is a great way to diversify your tax exposure in your retirement years.
But there is no free lunch. A traditional IRA defers any taxes until the money is withdrawn in retirement. Converting to a Roth is a taxable event, meaning you must pay taxes on whatever contributions and earnings haven’t previously been taxed.
And don’t get any ideas about using some of your IRA money to satisfy the tax bill. If you’re under age 59 1/2, any money taken from your traditional IRA and not rolled directly into the Roth will be viewed by the IRS as an early withdrawal, subject to federal taxes and a 10% early withdrawal penalty.
There are no income restrictions on doing a Roth IRA conversion.
Considering conversion? Act now
With account values for traditional IRAs having fallen somewhat amid the recent market correction, converting your lower account balance means a lower tax burden than if you’d done so earlier. If you’ve been contemplating a Roth IRA conversion, the pullback in the stock market may be just what you’ve been waiting for.
Bankrate has a great calculator that can help you determine whether a Roth conversion is the right move for you.