Is now the right time for a Roth conversion?

We know that taxes are one of life’s two inevitables. So, the question is not if you will pay taxes on your retirement accounts, but when and how much? That’s where Roth IRAs enter the discussion, especially in the current tax and market environment.

With a traditional IRA, pre-tax dollars grow tax-deferred. A Roth IRA is funded with after-tax dollars, meaning you’ve already paid income tax on your contributions, so your withdrawals after 59½ are tax-free if the account has been open for at least five calendar years.

Converting your traditional IRA to a Roth may make sense if you anticipate that tax rates will increase in the future or that your personal circumstances could put you in a higher tax bracket upon retirement because Roth withdrawals are tax-free. 

The downside is the money moved to a Roth is taxable when it’s converted, with the amount showing up as income on that year’s tax return. 

The effectiveness and advisability of a Roth conversion depend on your funding sources for paying these up-front taxes and your withdrawal strategy from your various assets now and in the future.

Choosing to convert to a Roth is not a simple decision. While now may be the best time in years to make the move because your investments may have lost value during the prolonged down market.