A recent MarketWatch article recommended that you should not allow yourself to be talked out of a Roth IRA conversion.
The most common reason to not convert a traditional IRA or a 401(k) to the tax-free, not tax-deferred, but tax-free Roth is the tax bill you incur by doing it.
When you take money from a tax-deferred IRA or 401(k) and convert it to a tax-free account in a Roth, you will owe taxes on it just as if you had taken the distribution. That’s why so many avoid it.
But according to MarketWatch, there are five excellent reasons to take another look at converting to a Roth:
- First, taxable distributions from a traditional IRA are added to the formula to compute how much of your Social Security is taxed. This could add up to a serious bite from your monthly check. Roth distributions are not added to the formula.
- Next, at 70 1/2 you have to take required distributions from your taxable accounts. Up to this point you controlled how much came out of your IRA, but no more. It will add up…
- Three, when one of you becomes a single surviving spouse, your tax status changes, but your required distributions do not, and the formula for taxing your Social Security will then be based on a single filing status not a couple. That means a bigger tax bite for the surviving spouse. Roths can avoid adding to the problem.
- Fourth, distributions from your traditional 401(k) and IRA will add to the amount you pay toward your Medicare Part B and D premium. After 70 1/2 that amount increases for most people and could cost you a couple thousand dollars a year in increased premiums.
- Last, the lower your taxable income in retirement the lower your affective capital gains tax rate. Roth distributions will not add to your taxable income and therefore will not cost you more in capital gains…
If your expected income in retirement is low enough to avoid all the thresholds for Medicare premiums, taxes on your Social Security benefits and capital gains, then a Roth may not be for you.
But, if you have done it right and have planned and saved and are expecting to have a comfortable retirement, you need to take one more planning step and have a second look at converting to a tax-free retirement with a Roth IRA conversion.