Today’s year-end planning tip is Roth IRA conversions:
So, a Roth IRA Conversions is the process of transferring retirement funds from a traditional IRA, SEP, or 401(k) into a Roth account. Since a Traditional IRA is tax-deferred while a Roth is tax-exempt, the deferred income taxes due will need to be paid on the converted funds at the time of conversion. There is no early withdrawal penalty.
The key is to Evaluate your personal tax situation: This strategy may be beneficial if a saver believes that the postponed tax liability in the traditional account will be more onerous as retirement approaches. For example, if they think tax rates will go up if they move to a higher tax state OR if they will be earning a higher income in the future. This may also be an interesting opportunity for folks who were laid off this year and have a lower income than usual. Be mindful, that if paying the tax bill now is too burdensome, then this may not be a good option for you.
A Planning Tip to consider is to sit down with your tax advisors to determine how much income can be realized within the current tax bracket before “creeping” into the next tax bracket to assess how much in traditional retirement funds to convert to a Roth.