Just about everyone enjoys finding new ways to save on taxes. Even though the tax season is winding down for many, that doesn’t mean you should put taxes completely out of mind. In fact, making important tax decisions right now can pay huge dividends later on down the road. For example, there is one thing that you can do today that would end up giving you more tax-free money later. Yes, you would have to pay more in taxes right now, but the benefits would likely outweigh the immediate expense. We’re talking about converting a traditional IRA into a Roth IRA. This could be a tough choice for many, especially if you don’t currently have the disposable income needed to take the tax hit. However, another nice feature of a Roth IRA is that it comes with the ability to undo it if you change your mind (but the change is time-sensitive).
2017 Might Be the Best Time
There are several reasons to consider converting your traditional IRA into a Roth IRA, but this year, in particular, it could have a huge impact. Because lawmakers are working on tax reform, including a big overhaul to the nation’s tax brackets the advantages of converting it in a year or two could be gone. Congress could also decide to speed up withdrawals from inherited IRAs, which would likely mean a Roth conversion during estate planning would not be as beneficial.
Big Tax Savings Are Possible
Want more reasons to seriously consider converting your IRA to a Roth? Currently, stock prices have risen to record levels. So what if the market suddenly takes a large dip after you convert? Reversing the transaction, which you could still do until October 15, 2018, would likely save you from paying taxes on the value that your IRA has lost. The advantage of a Roth is that it is made up of after-tax money, which means when you withdraw it you do not have to pay taxes on it. It also allows you to turn all that pretax money from a traditional IRA into after-tax savings. These types of conversions are becoming more popular with baby boomers because many of them are retiring with significant amounts of pretax savings in their IRAs and 401ks.
Of course, there is no one-size-fits-all answer to this question. Converting a traditional IRA into a Roth IRA is not the right move for everyone. However, it is generally considered a good move if you currently find yourself in a lower tax bracket but you believe you will most likely end up in a higher tax bracket later on down the road. And of course, you should have enough disposable cash in order to pay for the upfront tax hit that will occur when you make the conversion. One other nice feature of Roth IRAs is that you can withdraw money without paying a tax penalty because it’s money you’ve already paid taxes on. Therefore, if an emergency arises and you have to tap into your account, you won’t face any extra charges for withdrawing it early.
Not Sure if It’s Right for You? Contact GROCO
If you would like to learn more about this option and determine if it would be a good fit for you, then please contact GROCO for more help. Click here or give us a call at 1-877-CPA-2006.