Convert Traditional IRA funds to Roth IRA during low-income years to pay taxes at a lower rate and enjoy tax-free growth.
A Roth conversion is the process of moving money from a Traditional IRA (or other pre-tax retirement account) into a Roth IRA. When you convert, you pay income taxes on the converted amount in the year of conversion, but the money then grows tax-free and can be withdrawn tax-free in retirement.
Decide how much to convert from your Traditional IRA to Roth IRA. You can convert all or part of your balance.
The converted amount is added to your taxable income for the year. You'll pay income tax at your current tax rate.
The converted amount (after taxes) is transferred to your Roth IRA where it can grow tax-free.
The money grows tax-free in the Roth IRA and can be withdrawn tax-free in retirement (after age 59½ and 5-year rule).
Convert only enough to fill up your current tax bracket without pushing into a higher bracket.
Example: If you're in the 22% bracket and have $10,000 of room before hitting 24%, convert up to $10,000 to stay in the lower bracket.
Spread conversions over multiple years to manage tax brackets and avoid large tax bills.
Example: Instead of converting $100,000 in one year, convert $25,000 per year over 4 years to stay in lower tax brackets.
Convert assets that are likely to appreciate significantly, maximizing the tax-free growth benefit.
Example: Convert stocks or growth funds that you expect to appreciate more than bonds or cash.
For Roth conversions, you must wait 5 years before withdrawing the converted amount tax-free, or you'll face a 10% early withdrawal penalty (if under age 59½).
Example: If you convert $50,000 in 2024, you can withdraw that $50,000 tax-free starting in 2029, as long as you're also over age 59½.
Calculate your current tax bracket and determine how much room you have before hitting the next bracket
Ensure you have cash available to pay the conversion tax without using retirement funds
Contact your IRA custodian to initiate the conversion process
Consider working with a tax professional to optimize your conversion strategy
If you have both pre-tax and after-tax money in Traditional IRAs, the conversion will be taxed proportionally. You can't choose to convert only the after-tax portion.
Large conversions can increase your Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA) if you're 65 or older.
Conversions can affect college financial aid calculations, as they increase your taxable income for the year.
Roth conversions are complex tax strategies that can have significant financial implications. The information provided here is for educational purposes only and should not be considered as tax, legal, or financial advice. Always consult with qualified tax and financial professionals before making any conversion decisions. Tax laws and regulations can change, and individual circumstances vary significantly.