Does It Really Make Sense to Convert Retirement Savings to a Roth IRA in Retirement?


If you’re anything like me, you’ve run across several articles discussing how smart it is to convert retirement savings to a Roth IRA after retirement. As if planning for retirement is not intimidating enough, now we’re being given another piece of advice that may or may not be right.

Here, we’ll look into why anyone would want to convert their retirement savings to a Roth IRA and how to know if it’s a good move for you.

Roth IRAs are attractive

I get where the experts are coming from. Roth IRAs are pretty fantastic retirement vehicles, for a few reasons. When we fund a traditional IRA, 401(k), or other retirement account, it’s typically funded with pre-tax dollars. In other words, we don’t have to pay taxes on the money we contribute to these retirement accounts until we retire and withdraw the funds.

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Let’s say you earn $50,000 a year and contribute $10,000 to a pre-tax retirement fund. That means you only have to pay taxes on $40,000. It’s a great money-saving strategy for the here and now. However, Uncle Sam will want his cut based on our tax bracket when we retire and begin withdrawing the money.

It’s different with a Roth IRA because it’s funded with after-tax dollars. We paid taxes on the money when it was originally earned, so we don’t have to pay taxes on it again when we retire and make withdrawals.

Avoiding RMDs

In addition, Roth IRAs are exempt from required minimum distributions (RMDs). Due to RMDs, those aged 73 and older must withdraw a specific amount from their retirement account each year. There’s no “letting it ride” to leave the money to beneficiaries or ignoring the account while it continues to grow. The amount a retiree must withdraw is based on a formula that divides their retirement fund balance by a life expectancy factor.

For anyone who counts on these brokerage account withdrawals each year to cover retirement expenses, it’s not a big deal, especially if it doesn’t push them into a higher tax bracket. However, RMDs can be a burden to retirees with plenty of money to spend and no need for more. In a nutshell, they must make a withdrawal, pay taxes on it, and then decide what to do with the funds.

Because Roth IRAs are exempt from RMDs, the retiree gets to decide whether to withdraw. If they want, they can leave every penny of the investment in place, allowing it to continue growing.

A Roth IRA is an attractive investment for anyone who’s concerned about paying more taxes than is absolutely necessary in retirement and for those who want to decide if and when to make a withdrawal.

When conversion doesn’t make sense

While converting retirement funds into a Roth IRA makes sense for some people, it would be the wrong move for others. Here’s how to know where you stand:

  • You earn too much to contribute: For the tax year 2024, the most you can contribute to a Roth IRA under the age of 50 is $7,000. If you’re 50 or older, you can contribute a total of $8,000. However, there are limits on how much you can earn to make the full contribution. For 2024, single filers must earn less than $146,000, and joint filers must earn less than $230,000. If you earn more, the amount you may contribute decreases, eventually phasing out. Still, you have the option of investing in a traditional IRA instead.
  • You expect to earn more in retirement: If you’ve planned so well that you expect to earn more in retirement, you’re better off paying the taxes due now while you’re still working and in a lower tax bracket.
  • If you’re going to need every penny available in retirement: If you’re concerned about paying bills after you retire, you may want to consider whether it makes sense to pull money from a traditional retirement account, pay taxes on it, and reinvest it in a Roth IRA.

Here, we’ve focused on the wisdom of converting after retirement. The situation may be totally different if you choose to make the conversion in the years leading up to retirement. Your best bet is to decide whether you come out ahead paying taxes now or later in life. As with every major financial decision, it pays to speak with a financial advisor who can help you weigh your options.

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