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Practical Planning Tip: Year-end - Roth IRA Conversions

December 06, 2023

Today's year-end planning time is Roth IRA conversions.

A Roth IRA conversion 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.

Evaluate your personal tax situation: This strategy may make sense 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, which is not a far-fetched scenario for some high-net-worth families. This may also be an interesting opportunity for folks who were laid off this year and have a lower income than usual. In these situations, it may be better to pay those taxes now rather than later. It’s important to note that if paying the tax bill now is too burdensome, then this may not be a good option for you.

Planning Tip: is that It may be worth considering Roth strategies to hedge the risk of higher taxes in the future given rising federal budget deficits and the expiration of the current favorable tax rates in 2025. It’s also worth sitting 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.

You can watch the full clip here.