You have to pay taxes on your IRA contributions. But if you’re currently in a low-income tax bracket or not planning on making any more IRA contributions in the future, it might be worth considering converting your traditional IRA to a Roth account.
If you’re unsure whether this move is right for you, here are seven reasons why you should convert your IRA to a Roth account today.
Congress Looks Like It Will Lift the Cap on 401(k) Contributions
The 401(k) contribution limit is $18,500 per year, but that could change in 2019. If Congress lifts the cap, 401(k) participants would be able to sock away even more money for retirement.
Rates are Likely to Stay Low
The Federal Reserve is gradually raising interest rates, and the Fed expects to continue doing so over the next few years. If interest rates were higher, investors might have more incentive to invest in stocks or other assets with higher yields.
This could increase the demand for stocks and drive up their prices. However, if interest rates are low, investors might be less inclined to shift their investments from cash into riskier assets like stocks.
Are You Expecting Huge Medical Bills?
If you think you’ll be hit with hefty medical bills in the future, it may be better to leave your money in the traditional IRA. But if you’re expecting retirement and want your money working for you, it might make sense to take that tax-free distribution and roll over the same amount into a Roth account. And remember, once you convert your traditional IRA into a Roth account, you won’t be able to recharacterize your withdrawal as an IRA contribution later.
Have You Already Maxed Out Your Retirement Accounts?
If you’re self-employed, then the SEP-IRA is not available. If you don’t qualify for the SEP-IRA, you might want to consider the Solo 401(k). The Solo 401(k) lets your earnings grow tax-deferred, and your funds are distributed tax-free when they are used in retirement. And it can be set up as an individual retirement account or a business retirement plan.
Are You in a Low Tax Bracket Now But Expect to Be in a Higher One When You Retire?
If you are in the lower tax bracket now, then converting will save you taxes on your current income. If you are in the higher tax bracket now, then converting will not save you any taxes right now, but when you retire, it will mean that all your withdrawals from your Roth account will be tax-free.
According to experts at SoFi, “This account is different from a traditional IRA because you contribute after-tax money to it, so in retirement, you can withdraw your money tax-free.” It can be the difference between getting a chunk of money now or paying that same amount in taxes later. Use an IRA calculator to see how much money you could accumulate by using a Roth instead of a traditional IRA and calculate what that would amount to if taxed at rates in retirement.
Do You Have Funds in Other Retirement Accounts That May Become Subject to the Minimum Distribution Rule?
If so, you may be able to roll those funds into your current employer’s retirement plan, which they will distribute according to the employer’s plan. If not, you can convert your existing IRA account into a Roth one.
Alternatively, suppose you have an inherited IRA subject to required minimum distributions, and there are no other beneficiaries of the inherited IRA. In that case, you can also convert it into a Roth account.
Do You Want More Flexibility With Your Investments?
Roth IRAs allow you to withdraw your contributions at any time, tax-free and penalty-free. Withdrawals of earnings are taxable in the year they are withdrawn. Roth IRAs don’t have required minimum distributions during retirement, so you’re free to keep more of your money invested for longer.
If you have the extra cash, now is a great time to convert your traditional IRA into a Roth account. Not only will you avoid paying taxes up front and have more money in retirement, but it also allows for flexibility if you need to withdraw from your account at any point.
