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The information on this site does not modify any insurance policy terms in any way. A Roth IRA is the best retirement account around, according to many experts, and it offers huge benefits such as tax-free income and the ability to leave tax-free money to heirs. Plus, because of its tax-free status, a Roth IRA gives you flexibility when it comes to taking retirement income. But what if you have another retirement plan?
The good news is that you can convert plans such as a k or traditional IRA to a Roth IRA and take advantage of its range of benefits, and now may be a great time to do so. With a Roth IRA you can save for retirement on a tax-advantaged basis, giving you some attractive incentives to prepare for your golden years. Tax-free withdrawals are the biggest perk but the Roth IRA offers others.
You can pass down a Roth IRA, and heirs will receive some significant tax advantages, too. You can invest in a Roth IRA at any age as long as you have enough earned income to cover the contribution.
The Roth IRA also offers a lot of flexibility. There are no required minimum distributions , as you have with a traditional IRA. If you take earnings out early, you can be hit with taxes and a 10 percent bonus penalty, however. But some situations allow you to take penalty-free withdrawals. The withdrawal rules for a Roth conversion work somewhat differently, however.
Moreover, if you make multiple Roth conversions, each is subject to its own five-year rule. Within a couple weeks — and often sooner — the conversion to the Roth IRA will be made.
A Roth IRA conversion can be a good option for many individuals, and here are some of the most common situations where it would make sense. The reason for why you might be in a higher tax bracket could be anything: living in a state with income taxes, earning more later in your career or higher federal taxes later on, for example. She points to high-tax California and no-tax Texas as examples. In this example you avoid paying state taxes on your conversion in Texas and then avoid paying income taxes in California when you withdraw the funds at retirement.
A Roth conversion could also make sense if you want to leave your heirs tax-free income. This way could be particularly beneficial if you intend the money to go to someone other than a spouse, where the IRA inheritance rules are special and more advantageous. The types of accounts eligible for conversion generally fall into one of two categories. Here are some pointers from the experts on what to watch out for:. That means each distribution from the account contains some portion of before-tax and after-tax money.
Your tax advisor can help you with this calculation. Since there are no income eligibility limits for conversions, however, one common strategy is to make a non-deductible contribution to a Traditional IRA then convert it to a Roth IRA. Please consult a tax advisor to see if this strategy would work for you. Consult with your tax advisor for more information. Call to speak to a Wells Fargo retirement professional today. Investment products and services are offered through Wells Fargo Advisors.
WFCS and its associates may receive a financial or other benefit for this referral. Wells Fargo Bank, N. In limited circumstances, tax advice may be provided by Wells Fargo Bank, N. Information published by Wells Fargo Bank, N.
Banking Accounts and Services. Loans and Credit Accounts and Services. Investing and Retirement Our Investing Services. Wealth Management Wealth Services. Rewards and Benefits Explore Rewards. Comienzo de ventana emergente. Converting to a Roth IRA. A Roth IRA can be used as an estate planning tool because the assets can be passed on tax-free to your beneficiaries. Tax diversification of retirement assets allows for more flexibility to manage taxable income in retirement.
Expect to be in the same or a higher tax bracket during retirement. Can pay the conversion taxes without using the retirement funds themselves. May not need the funds for retirement and may want to transfer them to your beneficiaries. A Roth IRA conversion may not be appropriate if you: Are not sure what your tax situation will be like this year because once you convert you cannot recharacterize or "undo" the conversion.
Have to deplete other assets to pay the taxes due on the conversion. Consider what tax bracket you are likely to be in in the future. The key is to pay taxes when you are in a lower income tax bracket than you have been or will be. Paying now can work to your lifetime advantage.
Another point to consider: If you become a widow or widower in retirement, the remaining spouse could move into a higher tax bracket, Pfau says.
Read: Automatic transfer of small k balances is a big win for Vanguard and retirement savers. By converting at least some traditional IRA funds to a Roth, you give yourself more flexibility in spending down funds from a Roth tax-free once you are required to take RMDs. By making the conversion you can reduce the amount of RMDs you pay in retirement when you could be in a higher tax bracket, says T.
We consider that additional tax from the Roth conversion. For guidance on individual situations, speak with a trusted tax adviser. Have a question about your own retirement savings? Email us at HelpMeRetire marketwatch. Home Retirement Taxes Opinion.
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