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Staggering your Roth conversions can save a lot of money.
Under the right circumstances, a Roth IRA can be the best retirement account for tax management. On the back end, you simply can't beat the offer of no income taxes or required minimum distributions (RMDs) in retirement. The catch is the front end, when you pay taxes that might otherwise have boosted your portfolio.
If you're making a Roth conversion, you'll incur conversion taxes. A good way to help manage this is by staggering your conversions, moving a little bit at a time to minimize your tax brackets.
For example, say that you're 50 years old with $650,000 in your 401(k). A Roth IRA will have plenty of time to keep growing tax free before you retire in, say, 10 to 15 years. How would it work if you move just enough income each year to stay under the mid-tier 24% tax bracket? How about if you move enough to stay within 24%?
Here are some things to think about. A financial advisor can also give you personalized guidance based on your circumstances and goals.
A Roth conversion is when you move assets from a pre-tax retirement account into a Roth IRA.
A Roth IRA is a post-tax retirement account. This means that you fund it with money on which you have already paid income taxes. You get no tax breaks related to funding the Roth account. However, you then pay no further taxes on these assets. The funds grow tax-free, like with all retirement accounts, and in retirement you can withdraw this money with no income taxes. This can make a Roth IRA the best retirement account on the market for the right investor.
Roth conversions are when you move money from an existing, qualified pre-tax retirement account, like a 401(k) or a traditional IRA, and put it in a Roth IRA. There is no limit to how much money you can convert, so long as it comes from a qualified pre-tax portfolio. Mechanically, this is a simple transfer. You either direct deposit the assets from one account to the other, or you withdraw the funds and then deposit them in the other account.
When you make a Roth conversion, you add the entire amount converted to your taxable income for that year. For example, say that you convert $100,000 from your 401(k) to a Roth IRA in 2024. Your taxable income for 2024 would increase by $100,000. This means that part of making a Roth conversion is ensuring you have the cash on hand to pay the increased taxes. If you are over the age of 59 1/2, you can take that cash from the funds you are converting, which will in turn reduce your portfolio's capital. If not, you will need cash from other sources.
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