- While both types of IRAs provide good retirement savings options, there are times when converting from a traditional to a Roth IRA can be a good idea.
- Because of how they are taxed, Roth IRAs may be a good option for people who expect to be in a higher tax bracket when they retire and start to take withdrawals.
- A financial professional can help you evaluate your options and choose the best IRA type for you.
Roth IRAs have provided advantages for tax-free retirement income since their introduction in 1998. While the money you contribute to a Roth IRA is taxed at the time you make the contribution, distributions taken from Roth IRAs are exempt from federal taxes if you a) are at least 59 1/2 years old, b) have owned the Roth IRA for at least five years, and c) follow all other IRS guidelines.²
Events like the global pandemic and changes to IRA and federal tax rules have made Roth IRAs especially attractive for traditional IRA holders who could benefit from a conversion.
Here are three reasons you may want to consider converting your traditional IRA to a Roth IRA.
3 Reasons to Convert to a Roth IRA
1. Federal tax rates are at historic lows
Because of the Tax Cuts and Jobs Act of 2017, federal tax rates have been at historic lows, which means it may be a good time to consider converting your traditional IRA to a Roth IRA. Unlike traditional IRAs, where you pay tax at the time of withdrawal, Roth IRAs are taxed at the time you make the contribution, which protects you from getting taxed at a higher rate later when it’s time to begin taking distributions.
It’s important to keep in mind that you will have to pay taxes on the amount you convert since no taxes were paid for the money you originally contributed to the traditional IRA.
2. The rules for IRAs have changed
This reason to convert to a Roth IRA may or may not be relevant to you—it applies only if you have a non-spouse beneficiary listed for your IRA, or if you wish to list a non-spouse beneficiary.
In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act ruled that a non-spouse beneficiary of an IRA must completely withdraw an inherited IRA balance within 10 years, rather than over the beneficiary’s lifetime. The distribution can be taken as a lump sum or in payments over a 10-year period. There are no set guidelines for withdrawal other than it must be completed within 10 years.
This includes Roth IRAs; the new owner must deplete the inherited IRA in 10 years. However, there may no federal income taxes on the amounts withdrawn from a Roth IRA if IRS rules have been followed, making a Roth IRA appealing to those with one or more non-spouse beneficiaries listed.3
3. You may be in a lower tax bracket
If you expect your income to increase over time, which would put you in a higher tax bracket at retirement, this could be a good time to convert your traditional IRAs to a Roth since your contribution is taxed at your current, lower rate.
If you currently hold a traditional IRA and you're considering converting to a Roth IRA, talk to a financial professional about your options—you may benefit from paying taxes on the traditional IRA now, while federal rates are low. This also holds true if you're currently in a lower tax bracket and expect that to change over time. And if you have a non-spouse beneficiary listed on your IRA, you may want to switch to save them a potential tax headache in the future.
Contact an Alaska USA Financial Planning and Investment Services professional to discuss your options today.
This article is for informational purposes only. It does not replace financial or tax advice. Be sure to consult a tax or financial professional before making any decisions regarding your IRA.