This time on “Real Personal Finance,” we’re looking at Roth conversions – what they are, when you should do them, and when you shouldn’t.
First up, a Roth conversion is when you take money out of a pre-tax account like a 401(k) and move it to a post-tax account like a Roth 401(k). Sounds simple enough, right? The only issue is that in order to turn pre-tax money into post-tax money, you have to pay taxes on it, which means you have to add the money to your income for that year. For that reason, you want to time your conversion just right so you can keep the taxable rate as low as possible.
The most common time for people to perform Roth conversions is during a low-income year. If you’re switching jobs or taking a sabbatical, that might be the perfect year to make the jump if you know you have less money coming in than you will in the future. You may also want to do it if the stock market is doing particularly badly and your account drops in value, leaving you with less money to be taxed when you move it.
Roth conversions are an investment in your future that sets you up for a more predictable income stream in retirement. While it might not make much difference to you while you’re still working, we discuss the value of having money in both pre- and post-tax accounts when you retire.
We also discuss other reasons you may want to take a Roth conversion. If you’re nearing the age for required minimum distributions (currently age 73), the IRS requires you to start taking a certain amount of money out of your pre-tax accounts so they can get their cut. Converting your money can give you more control so you can take it out when you need it, not just when the government requires it.
But Roth conversions don’t always make sense. If you’re planning to give the money from your pre-tax accounts to charity anyway, there are better ways to do so that allows you to give more.
If you think you may want to perform a Roth conversion, reach out to your financial advisor or accountant now! Near the end of the year is the best time to do it since you have a good idea of what your income will be. Listen to the episode to learn more!
Connect with us!
Scott Frank on LinkedIn
Stone Steps Financial
Meg Bartelt on LinkedIn
Money can be confusing—but it doesn’t have to be. When you’re able to understand the complexities, you can make better decisions to improve your daily life. Are you ready to align your money with your ideal life? Connect with us at Stone Steps Financial or Flow Financial Planning.
Comments