3 Ways A Roth IRA Conversion Works
A Roth IRA is an excellent retirement vehicle to think about. Contributions are not tax deductible. However, withdrawals are tax-free. This provides the chance for substantial investment profits that will never be taxed over the account's lifetime.
This contrasts with a standard IRA, where contributions are tax-deductible, but withdrawals are taxed later. While there are income limits for direct Roth contributions, there are no income limits for Roth IRA conversions.
In retirement, you may find yourself in a higher tax bracket.
A Roth IRA conversion may make sense if you anticipate being in a higher tax bracket in retirement. It's an opportunity to make your retirement assets more tax-efficient by paying the tax when your tax rate is lower.
With proper preparation, you can reduce your tax bracket and use those years to convert to a Roth IRA after retirement and before RMDs begin.
RMDs are not required for Roth IRAs.
Traditional IRA RMDs are required at the age of 73. Even if the money is unnecessary, it must be withdrawn and is subject to taxation. This could put you in a higher tax rate. Furthermore, refusal to take the RMD might result in a 25% penalty, which is reduced to 10% if the RMD is withdrawn within two years.
A Roth IRA provides tax-reduction opportunities.
A Roth IRA can help with tax diversification. That way, you can review your tax situation each year and decide which account to withdraw funds from when needed.
