There's no question that saving for your golden years is a good idea. But choosing the right place to grow your wealth can be tricky.
Many people contribute to a traditional IRA but later decide to move the money into a Roth IRA instead. Fortunately, the law allows you to make such a conversion.
Here are a few instances where converting your traditional IRA into a Roth IRA might pay off.
Steal this billionaire wealth-building technique
The ultra-rich have also been investing in art from big names like Picasso and Bansky for centuries. And it's for a good reason: Contemporary art prices have outpaced the S&P 500 by 136% over the last 27 years.
A new company called Masterworks is now allowing everyday investors to get in on this type of previously-exclusive investment. You can buy a small slice of $1-$30 million paintings from iconic artists, all without needing any art expertise.
If you have at least $10k to invest and are ready to explore diversifying beyond stocks and bonds, see what Masterworks has on offer. (Hurry, they often sell out!)
What is a Roth IRA?
/images/2024/11/05/businesswoman-using-a-calculator-adobe.jpg)
Roth IRAs differ from traditional IRAs in a few ways. The biggest difference is in how a Roth IRA contribution is taxed.
Unlike with a traditional IRA, you don't get a deduction in the year of your contribution. However, the money does grow tax-free, and you can withdraw the funds tax-free during retirement.
Tax-free withdrawals are a major benefit of a Roth, but there are others. You do not have to make required minimum distributions, and passing down a Roth IRA to heirs gives them tax advantages.
In many cases, contributions can be withdrawn at any time without penalty, although early earnings withdrawals may incur taxes and penalties.
Here are some situations where converting a traditional IRA to a Roth IRA might make sense.
Want to learn how to build wealth like the 1%? Sign up for Worthy to get ideas and advice delivered to your inbox.
You make too much money
/images/2024/11/05/accountant-working-financial-investment-adobe.jpg)
This is a good problem to have, but if you make too much money, you might be ineligible to contribute to a Roth IRA.
For example, to contribute the full amount to a Roth, you must have a modified adjusted gross income of less than $146,000 if you are a single filer or less than $230,000 for married couples.
Fortunately, high earners can indirectly contribute to a Roth IRA. With this "backdoor" strategy, you first open a traditional IRA and make a nondeductible contribution. Then, you convert the IRA to a Roth IRA.
You can afford to pay the taxes right away
/images/2024/11/05/business-women-work-on-computers-adobe.jpg)
The tax man cometh for us all.
When you convert funds from a traditional IRA or 401(k) to a Roth IRA, you'll have to pay taxes on the converted amount. If you have the money to do so, a conversion can make sense.
It's best to cover the tax owed with savings you have already accumulated instead of holding back part of the converted amount. This allows more money to grow tax-free in the Roth.
If you’re over 50, take advantage of massive discounts and financial resources
Over 50? Join AARP today — because if you’re not a member you could be missing out on huge perks. When you start your membership today, you can get discounts on things like travel, meal deliveries, eyeglasses, prescriptions that aren’t covered by insurance and more.
How to become a member today:
- Go here, select your free gift, and click “Join Today”
- Create your account (important!) by answering a few simple questions
- Start enjoying your discounts and perks!
You’ll also get insider info on social security, job listings, caregiving, and retirement planning. And you’ll get access to AARP’s Fraud Watch Network to help you protect your money, as well as tools to help you plan for retirement.
Important: Start your membership by creating an account here and filling in all of the information (Do not skip this step!) Doing so will allow you to take up 25% off your AARP membership, making it just $15 the first year with auto-renewal.
You're already retired
/images/2024/03/25/laptop-and-fintech-phone-app.jpg)
Converting to a Roth IRA early in retirement — when income is typically lower than it was during your working years — can reduce your tax bill on the conversion.
In fact, you might consider slowly converting to a Roth over several years as a way to keep your overall tax on the conversion lower. Consult with a tax professional to craft the best strategy for keeping your taxes low.
You expect to pay higher taxes in retirement
/images/2024/11/05/having-virtual-video-call-meeting-adobe.jpg)
If you've built up a large nest egg — or if you are looking ahead and expecting your portfolio to grow by leaps and bounds — there is a chance that your taxes will actually be higher during retirement than they are during your working years.
In some cases, converting to a Roth IRA during your working years or gradually doing so early in retirement will cost less in taxes than waiting to make withdrawals from a traditional IRA later on.
Converting can also make sense if you currently live in a low-tax state — such as Texas, which has no state income tax — but plan to move to a high-tax state, such as California, later on.
Trending Stories
The stock market has fallen
/images/2024/11/05/stock-crash-market-exchange-adobe.jpg)
Nobody likes to see their account balance fall due to a bear market in stocks. But you can take advantage of such a downturn by converting to a Roth IRA.
Because your balance is lower, you'll pay less in taxes on the conversion. With any luck, your balance will eventually rebound after converting to a Roth IRA, and all your gains will be tax-free.
You lose your job or see income fall for another reason
/images/2024/11/05/businessman-sit-on-the-stairs-adobe.jpg)
Losing a job is never fun. But one silver lining to a job loss or other income drop is that it creates the opportunity for a Roth IRA conversion at lower tax rates.
Converting funds from a traditional IRA to a Roth IRA counts as ordinary income and will be taxed according to your tax bracket. So, it might be smart to make the conversion in a year when your income is unusually low.
You have time to let the money grow
/images/2024/11/05/american-dollars-in-focus-adobe.jpg)
Leaving a converted amount of cash in your Roth IRA for as long as possible maximizes its tax-free growth. That helps offset the initial cost of paying taxes at the time of conversion.
In addition, having more time to let the money grow can benefit your heirs. More on that in a moment.
You intend to leave money to heirs
/images/2024/11/05/man-examining-and-signing-testament-adobe.jpg)
A Roth conversion can be a good option if you want to provide tax-free income to your heirs. Non-spousal beneficiaries typically don't get the same tax advantages as spouses, so a Roth conversion can make sense when leaving money to children or others.
Most withdrawals from an inherited Roth are tax-free. However, if the Roth is less than five years old, earnings withdrawals may be subject to income tax.
In 2023 Americans lost over $10 billion to identity theft and fraud
That's right. According to the FTC, Americans lost over $10 Billion to fraud and identity theft in 2023.
But you can safeguard your data with all-in-one identity theft protection services from Aura which comes with $1,000,000.00 in identity theft insurance1 <p>Identity Theft Insurance underwritten by insurance company subsidiaries or affiliates of American International Group‚ Inc. The description herein is a summary and intended for informational purposes only and does not include all terms‚ conditions and exclusions of the policies described. Please refer to the actual policies for terms‚ conditions‚ and exclusions of coverage. Coverage may not be available in all jurisdictions.</p> per adult, to cover you should you have eligible identity theft-related losses.
An individual plan starts at $9 per month, and you can choose a family plan that outmatches most others - includes Dark Web monitoring to scour data breaches and leaks for your sensitive personal data — such as Social Security numbers (SSN), Medicare information, and phone numbers.
Before you make your next online purchase, protect what you’ve built for a fraction of what it could cost you if your data were compromised.
Bottom line
/images/2024/11/05/a-woman-working-outdoors-adobe.jpg)
A Roth conversion might not be the right move for everyone, but it can help others eliminate some money stress.
One key to making a successful Roth conversion is to undertake the process at the right time. If you're unsure of whether this strategy makes sense for you, consult with a financial advisor or tax professional.
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
Earn 1% cash back on up to $3,000 in debit card purchases each month.2 <p>See website for details.</p> No minimum deposit or balance. FDIC Insured.
Become a member and enjoy discounts on things like travel, meal deliveries, eyeglasses, and more.
Helps to identify and prevent fraud in real-time with 24/7 U.S.-based support.
Subscribe Today
Unlock the Best Banking Deals and Bonuses
From high-yield savings accounts to cashback checking and sign-up bonuses, we bring you the best banking offers to grow your money smarter.