To Convert, Or Not?
For many years now the decision to convert IRA money to ROTH IRA has both promoters and detractors. Why is that?
Most of the fuss is over whether to pay taxes now or later. If you knew with certainty whether tax brackets would be higher or lower than where you are currently at, the decision becomes easier. Making a stab at that proposition is almost impossible, unless your time frame for making that decision is in the short term.
The chances of income tax brackets coming down from where they are currently at is a low probability. So, if excess money sitting in a bank savings account or money market is not paying at least 3% and/or not needed for liquidity or emergencies, then some amount of ROTH conversion makes sense. Those low interest-bearing accounts can then be used to actually pay your taxes in the year of conversion.
Another reason to convert is if you don’t have the ability to contribute to an individual ROTH IRA or ROTH 401K/403b at work. Most people are “top heavy” with pre-tax positions as it is, so little to no after-tax investments makes it more difficult to create tax planning strategies after retirement.
A third reason to do some ROTH conversions is to benefit the beneficiaries of your estate. In other words, reducing the taxes they will have to pay when they inherit that part of your estate.
So how much to convert to ROTH if you do go forward? Just enough or up to an amount that does not put you in a higher tax bracket could be one strategy that makes sense.
Having your financial advisor or tax accountant run some scenarios for you ahead of any decision is best. So, to convert or not to convert…… that is the question.