A Roth IRA conversion, given current market conditions, not only makes sense financially, but it also gives investors a way of responding to that “do something” desire when experts are otherwise encouraging them to stay the course on their investment allocations and long-term goals.
From a financial perspective, first ask yourself two questions:
1) How long can you delay accessing the money you convert?
“Roth IRAs are generally the last money we recommend accessing because you hope to enjoy the tax-free growth as long as possible,” said Wayne Firebaugh, a certified financial planner.
2) Do you have a source of non-retirement funds to pay the taxes that result from the conversion?
“The amount you convert from an IRA to a Roth IRA is exempt from the 10% premature distribution penalty regardless of how old you are,” said Firebaugh. “However, if you are not 59 ½, any money you withdraw from the IRA to pay the taxes is subject to taxes plus the penalty.”
That penalty, he says, also changes the breakeven calculation and can often make the Roth IRA conversion much less attractive.
“When discussing tax breakeven considerations, we remind investors that future tax law is uncertain but a Roth IRA conversion insulates them from future increases in tax rates,” said Firebaugh.
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