Did you know that 36% of non-retirees have an individual retirement account (IRA)? While many people can benefit from opening one of these retirement accounts, it’s also important to consider the type of IRA you contribute to as well. What are the best IRA plans and how you should get started?
If you’re one of the many women who have a traditional IRA account, you may want to consider converting it to a Roth IRA. While it’s not the right choice for everyone, a Roth IRA is a much better solution for certain women who are trying to plan their finances for retirement.
In this guide, we’ll look at the main benefits of Roth conversions.
Roth IRAs vs. Traditional IRAs
Before moving your IRA to a Roth IRA, you need to understand what the differences between them are.
While there are many differences between traditional and Roth IRAs, the main thing to understand is that paying taxes on your contributions will differ. With a traditional IRA, you’ll pay taxes as income once you withdraw your contributions. However, with a Roth IRA, you’ll pay taxes when contributing.
If you’re older than 59½, you’ll be able to withdraw your contributions tax-free later on. However, remember that it will also need to have been more than 5 years since you contributed to your Roth IRA for the first time.
Another difference between Roth IRAs and traditional IRAs relates to required minimum distributions (RMDs). You’ll be required to start taking RMDs from a traditional IRA account once you reach the age of 72.
With Roth IRAs, however, you won’t be required to withdraw money at all. You can pass the account on to your heirs if you decide to do so.
Who Should Convert to a Roth IRA?
One of the main situations in which you might want to convert your IRA to a Roth IRA is if you expect to enter a higher tax bracket in retirement.
A Roth IRA is beneficial for someone who makes a low income now but will expect to make a higher income later. Converting to a Roth IRA can help you pay fewer taxes in the long run.
Another reason why you might want to convert to a Roth IRA is if you want to pass on money to your heirs. If you don’t expect that you’ll need to use the funds in your traditional IRA, then it might be worth converting it to a Roth IRA.
Since you won’t need to make RMDs with a Roth IRA, your savings can continue to grow and can be withdrawn tax-free by your heirs if certain conditions are met.
Benefits of Roth Conversions
So what are the main advantages of converting to a Roth IRA? Here are the main benefits of making the switch.
Withdraw Your Money Tax-Free
One of the key advantages of converting to a Roth IRA is that you can withdraw your money tax-free.
With a traditional IRA, you’ll have to pay taxes once you withdraw it and will need to consider it income. You’ll also need to pay taxes on the money you earn through your investments.
With a Roth IRA, you can end up saving a lot of money on taxes, particularly if you’ll be in a higher tax bracket in retirement. This makes opening a Roth IRA well worth it if you want to go ahead and take care of your taxes ahead of time.
Avoid RMD Penalties
If you have a traditional IRA, you’ll be required to take out RMDs starting at age 72. If you fail to do so, then you’ll have to pay tax penalties to the tune of 50% of the amount that you should have withdrawn.
With a Roth IRA, you won’t have to make withdrawals from your account if you don’t want to. This means you’ll avoid potential penalties for failing to withdraw your savings.
Grow Your Money Longer
Because Roth IRAs don’t require you to withdraw money, you can continue to grow your account for a longer period of time. You can keep your money in an account where it can continue to grow tax-free.
In addition, since you don’t have to withdraw the money at all, you can also leave your money to your heirs. They won’t need to pay federal income tax on the account if it’s been open for 5 years or more.
Get a Roth IRA With a High Income
One major reason why you may decide to convert your IRA is if you can’t get a Roth IRA otherwise.
Whereas a traditional IRA doesn’t have income limits, you’ll need to have less than a certain amount of income to open a Roth IRA. However, you can use a “backdoor” strategy to convert a traditional IRA to a Roth IRA, even if your income is too high for you to open a Roth IRA outright.
However, this strategy has some unintended consequences that could be problematic, so make sure that you understand it fully before doing it. Remember that you’ll have to wait five years to withdraw funds. You’ll also increase your taxable income since the pre-tax portion of your converted funds will become a part of your taxable income.
How to Initiate a Roth IRA Conversion
Going through with a Roth IRA conversion is fairly simple.
To get started, you’ll need to get in touch with the financial institution of your traditional IRA and request that they transfer your money and help with the conversion process. They can initiate a direct transfer to another financial institution or to the same institution, depending on where you’re opening a Roth IRA account.
An alternative to getting a direct transfer from your financial institution is to handle the Roth IRA conversion manually. To do this, you’ll withdraw money from your traditional IRA and then will deposit it into a Roth IRA account on your own.
Keep in mind that you’ll have 60 days to complete the transfer, or you might need to pay penalties. Also, remember that the money will become taxable as well.
Deciding Whether a Roth IRA Conversion Is Right for You
If you want to improve your retirement plan, consider the benefits of Roth conversions. Depending on your goals, a Roth IRA could be a much better choice for making sure you’re able to retire comfortably.
Need help with financial planning? Learn more about our wealth creation solutions for women now.
Schedule a Retirement Strategy session with Financial Advisor, Jen Trowbridge.
How to Create Real Financial Security in Your Life