Converting IRA to Roth IRA
You may not know this, but your Traditional IRA comes with a not so silent partner waiting to take their cut of your retirement account: the IRS and most likely the State you live in. When you placed funds within the account, you took a tax deduction, postponing the taxes to a later date. However, once you retire and on each occasion you remove funds from that account, you’ll owe the current tax rate in your income bracket on the amount you’ve withdrawn.
For now, that may seem acceptable, especially if you expect to be in a lower tax bracket during retirement. However, there’s no guarantee that circumstances won’t change in a way that negatively impacts your funds. It’s entirely plausible that (funding trillions of dollars of government stimulus money in 2021 will come with higher income tax brackets down the road) so perhaps your income will be less but your tax bracket might be higher. Without a crystal ball, you cannot predict the exact percentage the IRS will take, but the amount you see on your statement now will be drastically depleted in ways out of your control. This makes retirement planning a game of speculation.
There is one sure way to mitigate this issue. You can place the funds within a Roth IRA instead of a Traditional IRA. This is the “pay them now vs pay them later approach.” The funds within a Roth IRA do not qualify for a tax deduction when they’re initially invested, but the funds grow with deferred tax status and tax free withdrawals. So the next time you see your IRA statement, be realistic with yourself if you’re doing some planning and figure out how much of that account is actually yours. As opposed to a Traditional IRA, when you look over your Roth IRA statement, every dollar is yours, whether that’s $100,000 or $1 million.
By taking this step, you can rest assured that the funds in your account represent the value of the money you can use, removing taxes and stress from your retirement and allowing you to plan your retirement in confidence.
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