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Great Time for A Roth Conversion

By June 13, 2022January 31st, 2024Personal Tax Items

If you have ever considered converting a Traditional or regular 401k (403(b), IRA, SEP, etc. included) into the Roth version, now may be the best time.

Difference Between a Traditional and Roth Retirement Account

The difference between a Traditional and Roth account involves post and pre-tax income. Simply put a Traditional contribution to your retirement account comes out pre-tax and gives you a deduction or reduction in income. However, once you retire or withdraw the money at any point in your life you must pay taxes on the amount you put in AND the gains earned in your account

Contrary, a Roth retirement account is funded with post-tax dollars, which means the contributions were previously taxed before going into your retirement account. Unfortunately, there is no tax deduction or reduction in income when contributing to a Roth account. The benefit is once you withdraw the funds in retirement, they are completely tax-free including the gains earned in your account.

What a conversion means for your taxes

If you are performing a Roth conversion, keep in mind you will need to pay taxes on the original Traditional contribution amount. It is recommended to speak with your financial advisor and tax professional before performing a Roth conversion.

Why Now

Most retirement accounts invest in the stock market either through mutual funds or individual stocks. With the Dow Jones down ~14% and the S&P 500 down ~18% year to date, many of our retirement accounts are negatively affected.

We have two bright sides here:

  1. The market always comes back
  2. When performing a Roth conversion, you now have fewer funds to pay taxes on.

The benefit here is to take advantage of the smaller account balance to reduce your tax burden when performing a Roth conversion, then ride the stock market gains back up over time.