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Is the Time Right for a Roth IRA Conversion?

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According to ThinkAdvisor, the recent market downturn has presented an opportunity for those considering converting to a Roth IRA.

Why Convert in a Downturn?

The primary reason to consider converting a traditional IRA to a Roth IRA in a market downturn involves the tax savings that such a move can generate. When you convert to a Roth IRA from a traditional IRA, you pay taxes on the entire value of the amount converted at your current ordinary income tax rates. If the value of the IRA has declined, you can convert the IRA assets at that lower value at a lower tax liability.

Post-conversion, any growth in the Roth assets from a market rebound will be tax-free.

However, the article states that even if the market continues to fall after you convert to a Roth IRA, and thus the value of your account assets falls below what it was when you converted, you still have options: If the results of a Roth conversion are poor, the transaction can be reversed or “recharacterized” as late as October 15 of the year following the initial conversion.

For the full tax implications of a Roth conversion, or that of a recharacterization, it is a good idea to consult a tax professional.

Other Roth IRA Considerations

The article adds that it is typically advisable for someone to convert to a Roth IRA if they expect to be in a higher income tax bracket during retirement, or when the funds will be withdrawn. This generally means that a Roth conversion is most valuable for younger investors who may be in a lower tax bracket today than after many years.

Tax rates are almost certain to rise with time, so the more time you have before retirement, the more likely it is that you will pay less in taxes on the IRA funds at today’s tax rates.

AAII Articles on Roth Conversions

If you want to learn about converting to a Roth IRA, AAII offers several articles to help you make an informed investment decision:

 

 

 

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