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Should You Convert Your Roth IRA during COVID-19?

Get this: more than one-third of Americans own and contribute to an IRA account. While most households have a traditional IRA account, others have Roth IRAs too.

But here’s the catch: the Coronavirus pandemic has left many people wondering about the state of their Roth IRAs. Are you thinking about postponing your retirement? This guide will let you know if you should convert your Roth IRA or not.

Converting Your IRA Account

If you have a standard retirement account, you have probably thought about converting it into a Roth IRA already. With this conversion, investors can switch money around and pay taxes on the funds based on federal and state rates. Then, they can move it to a Roth IRA, where it can expand without taxes.

However, there are certain rules to follow if you want to withdraw from your Roth IRA account tax-free. First of all, you have to wait for five years until they reach maturity. Then, you can convert them with ease. While this is a great solution for some, it may not be right for others.

First things first, are you entering retirement yet?

If that’s the case, then you might want to leave your funds within your Roth IRA account. That’s because you’re already paying taxes on this money, meaning that it costs cash to convert it.

Also, it can take a really long time to justify that debt. Of course, you can always use a “Roth conversion calculator” to help you out with the step. However, this can be challenging information to rely on since calculations are based on future income taxes.

Obviously, it can be pretty hard to predict where your income tax rate will be in the next couple of years, let alone the next 10, 20, or 30 years. So, take a look at your projected and current income bracket before you turn your traditional IRA into a Roth IRA. When you are ready, feel free to complete a budget for retirement with your future tax bracket in mind.

Deciding on Paying Taxes

As we mentioned above, converting your IRA to a Roth IRA can be pricey. That’s because you still have to pay fees on your original IRA as well. In an ideal world, your money wouldn’t necessarily come from your retirement account.

If you end up using your traditional IRA funds to pay off your taxes, you might just want to hold off on this transaction. One simple exercise is to think about the cost of converting IRA accounts over the next few years. This can also help you avoid hitting a more advanced tax bracket too.

Occasionally, the most difficult thing to do can be the best financial move for you. For instance, if you have $300,000 in an IRA account, you could end up paying $75,000 of those funds to the IRS.

On the bright side, you can always offset the Roth IRA conversion taxes with charitable donations. This is an effective way to reduce the cost of converting your traditional IRA to a Roth IRA. However, you have to have enough money and enough goodwill to tackle this financial strategy.

Talking About Tax Brackets

Now it’s time to talk about tax brackets. For those of you who want to return a lower tax bracket, you might want to hold off on converting your IRA funds. That’s because you will end up paying much more money on your conversion than you would if you waited until retirement.

Since Roth IRAs are contributed to with funds that have already been taxed, withdrawing funds is a totally different process. Thus, distributions are considered to be tax-free as long as:

  • You are over 59½ years old
  • You have had your Roth account for at least five years

Nevertheless, the age restriction doesn’t apply if the person who holds the account is either disabled or deceased. If not, you can still get a 10 percent penalty for distributing funds too early. Yet, this only applies to “investment earnings.”

The best part is that you can withdraw your original contribution before the age of 59½ because you’ve paid a tax on your investment. This is why some consider a Roth IRA to be a type of savings account. Whether you want to save for an emergency fund or college tuition, your Roth IRA could have you covered.

Lastly, if you are an IRA investor, a conversion could actually be a good move for you financially. Just be sure that your conversion makes sense before you move any money from your savings.

Consider This Before You Convert Your Roth IRA

Think you have to convert your Roth IRA due to the Coronavirus? Think again.

To be quite honest with you, this decision shouldn’t be based on the decline of markets. Instead, converting your traditional IRA to a Roth IRA should be based on low vs. high tax rates. Although there are many benefits of conversion for some, there is also a mountain of tax fees for others.

That’s why it’s important to use a Roth calculator to decide if converting your Roth account is the right choice for you to make. Once you consider social security savings and tax penalties, the decision should be a piece of cake.

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If that’s the case, then don’t hesitate to contact us and schedule an appointment today.


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