Here’s what you need to know about IRA’s:
A traditional IRA allows you to invest pre-tax money today, but requires you pay taxes when you withdraw the money in the future (like a 401k).
A Roth IRA means you are investing after-tax dollars today, but do not have to pay taxes when you withdraw the money in retirement.
According to James A. Daniel, CFP®, You should consider a Roth IRA conversion if:
- You expect your tax rate to be higher when you retire
- You have enough time to let your investments grow before you withdraw any money
- You have enough money to pay any taxes due when you convert
- You want to leave the money to heirs
You should avoid a Roth IRA conversion if:
- You expect your tax rate to be lower in retirement
- You have to use cash from the IRA to pay the taxes due when you convert
- You are already retired and the conversion increases your current income tax rate
- You have a child applying for financial aid at school
- You plan to use the money in your IRA for healthcare costs