Pros and Cons of Roth IRA Conversion

Initiating a Roth IRA conversion is something that many people are choosing to do with their retirement plans in today's market. This strategy can be beneficial depending on your situation. However, there are a few drawbacks that you should know about as well. Here are some of the pros and cons of a Roth IRA conversion.


One of the biggest benefits of doing a Roth IRA conversion in today's market is that you will have to pay lower taxes. The amount of money that you convert over to a Roth IRA will be treated as income and taxed. Since the market is down compared to what it normally is, you are going to be paying less money in taxes. This can save you a lot of money to keep in your retirement funds. Many people are also choosing to pay for taxes out of their own pockets instead of with retirement funds. If this is the case, it can substantially help out your savings as well.

Another big advantage of converting over to a Roth IRA is that you can achieve tax-free growth on your investments. When you contribute money to a Roth IRA, you will do so with after-tax funds. At this point, you are allowed to invest your money into the financial markets. Anything that you bring in from your investments is allowed to grow tax-free. If you choose the proper investments, you could potentially bring in a great deal of tax-free income. When you reach the age of 59 1/2, you can start taking out money without paying any taxes whatsoever on it.

When you convert over to a Roth IRA, you will be able to put more money away for retirement purposes. Even though the traditional IRA and the Roth IRA have the same contribution limits, you will be able to save more effectively with the Roth IRA. With the traditional IRA, you can put away $5000 per year. However, when you reach retirement age, you are going to have to pay taxes on this $5000. With the Roth IRA, you can put $5000 of after-tax money in.


The biggest disadvantage of converting over to a Roth IRA is that you are going to create a taxable event. When this happens, you have to pay taxes on the entire amount that you transfer over. Since you have been putting money into your traditional IRA without paying taxes on it, now is the time to pay the government. If you have a substantial account balance built up, this could result in huge taxes all at once. It can even put you into a higher income tax bracket for the year.

Another problem that you might run into with this conversion is the income limits associated with the Roth IRA. In order to contribute to a Roth IRA, you have to make less than $120,000 as an individual or $176,000 as a couple.

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