There are times when it makes sense to convert retirement funds to a Roth IRA. According to financial advisor Darcy Bergen it’s important to understand the advantage of paying taxes now rather than later.
It often makes sense to convert your retirement fund to a Roth IRA. Factors that play into this decision include your tax bracket, income, and financial goals. Learn when it makes sense to take money out of a traditional IRA or other account and invest it in a Roth IRA, as explained by author and financial advisor Darcy Bergen.
Darcy Bergen Discusses Tax Implications of Roth IRA Conversions
It’s essential to understand the tax implications of converting your retirement account to a Roth IRA. As part of the conversion, you pay income taxes on the amount transferred to a Roth IRA. It makes sense to pay taxes now to reduce your tax burden down the road in some cases. It would help if you had a financial advisor, such as Darcy Bergen, who could help you compare your tax situation now versus years from now.
When to Convert Your Savings to a Roth IRA, per Darcy Bergen
Here are several situations where sacrificing now can save you money later:
- You expect to be in a higher tax bracket when you cash out your retirement account. You are currently in a low tax bracket and expect your income and taxes to increase significantly in the future. In this case, it makes sense to pay taxes on the account now. You pay taxes on the converted funds now to avoid higher income taxes once you begin taking distributions from the new Roth IRA account.
- You have experienced financial losses that will limit your tax burden from the conversion. According to Darcy Bergen, it might make sense to work on the conversion when you have specific losses that can offset the tax burden of the Roth IRA conversion.
- You don’t plan to take distributions after turning 72 years old. Some accounts require a minimum distribution at age 72. However, Darcy Bergen reminds investors that a Roth IRA does not require a minimum distribution each year.
- You move, and your new state has higher income taxes. Imagine moving from Florida or Tennessee, which have no income taxes, to California or New York, which have high-income taxes. In this case, it makes sense to consider moving some of your retirement accounts to a Roth IRA before you move.
Darcy Bergen Recommends Converting to a Roth IRA to Protect Your Heirs
“You can leave a tax-free inheritance to your heirs. If you have retirement funds meant for your loved ones, consider converting them to a Roth IRA so that your heirs do not have to pay taxes before receiving the money,” says Darcy Bergen.
There may be other scenarios where a Roth IRA conversion makes sense for you. A financial planner with tax expertise can help you make the right decision, according to Darcy Bergen.
Investment advisory and financial planning services offered through Simplicity Wealth, LLC, a Registered Investment Advisor. Sub-advisory services are provided by Advisory Alpha, LLC, a Registered Investment Advisor. Insurance, Consulting and Education services offered through Bergen Financial Group. Bergen Financial Group is a separate and unaffiliated entity from Simplicity Wealth and Advisory Alpha.
This material is intended for educational purposes only and is not intended to serve as the basis for any financial decision.