Should I Convert My Traditional IRA To A Roth IRA When The Market Is Down? | Smart Change: Personal Finance
(Charlene Reinhart, CPA)
If you’re considering transferring money from a traditional individual retirement account (IRA) to a Roth IRA, this might be a good time to screw up the move.
last monday, Dow Jones Industrial Average It fell 876 points after the troubled inflation report. The Standard & Poor’s 500 It entered bear market territory after falling 3.9% or 151.23 points. Furthermore, the Federal Reserve raised interest rates by 75 basis points during the June Federal Open Market Committee meeting.
Recent market moves may not be good for your portfolio, but they could be a potential win-win if you decide to make a Roth transfer. Here are some things to consider before transferring money from a traditional to a Roth IRA.
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How Traditional and Roth IRAs Work
IRAs, both traditional and Roth versions, can boost retirement savings while helping you get tax benefits.
The timing of tax liens depends on which account you choose to put your money into. A traditional IRA allows you to set aside pre-tax funds for retirement. You won’t have to pay taxes on the money until you withdraw the money, usually years after retirement, often when your tax rate drops.
On the flip side, you pay taxes on your Roth IRA dollars right away. You can take care of your tax bill up front and enjoy tax-free growth and withdrawals during retirement. But you must not exceed income limits to qualify to make direct contributions to a Roth IRA. High-income earners can bypass this limitation with a Roth IRA.
Trading in a traditional 401(k) for a Roth IRA
If you have money in a traditional IRA right now, there is no need to stay there until retirement. You can transfer money to a Roth IRA and get tax-free income later.
This may sound simple, but there is one thing that can stand in your way: taxes. Since you may not have paid taxes on your traditional IRA contributions, you will have to do so in the year you make a Roth conversion. The amount you transfer between accounts will be taxed at regular income rates. If you pass a large balance, this extra money can push your income into another bracket.
Roth’s transformation may be better now than later
Let’s say you had $100,000 in a traditional IRA, but the value dropped to $70,000 when the market fell. You can save money by transferring $70,000 to a Roth IRA instead of the original $100,000. If the equity in your portfolio recovers, you will be able to enjoy those gains in your Roth account without worrying about taxes when withdrawing funds.
Although you might get away with paying less taxes during a market downturn, that doesn’t mean you should automatically commit to a Roth conversion right now. You should speak to your tax expert or accountant to make sure you are on the right track.
Here are some questions to consider before going ahead with a Roth conversion:
- Do you expect to make more money in 2022, pushing you into a higher tax bracket?
- How much money do you want to transfer from a traditional to a Roth IRA?
- Have you made non-deductible contributions to a traditional IRA?
- What tax bracket will you fall into after you make a Roth transfer?
- Are you familiar with the five-year rule for Roth conversions?
- How much do you have to pay in taxes?
If you’re not prepared for taxes, it may not make sense to do a Roth conversion now. But tax rates are expected to rise later, so you have to pick your fight. Take a look at the regular income tax rates below for 2022 so you can know what to expect.
|
Not connected |
Introducing married couples together |
Head of the family |
modified |
|---|---|---|---|
|
0 dollars to 10,275 dollars |
0 to 20,550 USD |
Up to $14,650 |
10% |
|
$10,276 to $41,775 |
US$20,551 to US$83,550 |
$14651 to $55,900 |
12% |
|
$41,776 to $89,075 |
$83,551 to $178,150 |
$55901 to $89,050 |
22% |
|
$89,076 to $170,050 |
$178,151 to $340,100 |
$89,051 to $170,050 |
24% |
|
$170,051 to $215,950 |
$340,101 to $431,900 |
$170,051 to $215,950 |
32% |
|
$215,951 to $539,900 |
$431,901 to $647,850 |
$215,951 to $539,900 |
35% |
|
Over $539,900 |
Over $647,850 |
Over $539,900 |
37% |
Turn Market Pain into Roth IRA Gains
Your portfolio may be down now, but that doesn’t mean you can’t uncover some unique opportunities. This might be the perfect time to make a Roth transfer if your wallet has taken a big hit. Evaluate the pros and cons so you can increase your chances of making big profits on your tax return now and securing tax-free income later.
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