Are you prepared to pay one of the biggest expenses you’ll face in retirement? It’s not the cost associated with housing, travel, food, or even healthcare. While those are all major expenses for retirees, there’s another cost that could put a significant dent in your cash flow and could possibly impact your financial stability if you don’t have a strategy in place.
It’s taxes. Just because you stop working doesn’t mean you stop paying taxes. As a retiree, you will likely face tax obligations for a wide range of income sources, including investment income, retirement account distributions, rental income, dividends, pension payments, and even Social Security benefits.
If you don’t plan ahead for those tax obligations, you may find yourself with less net income than you anticipated. The good news is that there are a number of strategies you can implement to reduce your tax burden in retirement and maximize the amount of net income you have available to fund your lifestyle.
One such strategy is a Roth conversion. While it’s not appropriate for everyone, a Roth conversion can work well for many investors who have a substantial amount of assets accumulated inside a traditional IRA.
Not familiar with how a Roth conversion works? Below is a brief description of the process along with some important points to consider. If you’re approaching retirement and have much of your retirement assets in a traditional IRA, a Roth conversion could be a strategy that is worth exploring.
What is a Roth conversion?
As the name suggests, a Roth conversion is the process of transitioning traditional IRA assets into a Roth IRA. There are a number of reasons why one may do a Roth conversion, but the primary motivation is usually to reduce tax liability in the future.
With a traditional IRA, you have the opportunity to deduct your contributions from your current year taxes. Your assets also grow tax-deferred while inside the account. However, all distributions from the traditional IRA are counted as taxable income.
A Roth IRA offers tax-deferred growth, but no upfront deductions for contributions. Instead, the Roth allows you to take distributions tax-free as long as the account has been open for at least five years and you are either 59 ½ or older or disabled. That means that you can use a Roth IRA to create a tax-free income stream in retirement.
You can initiate a Roth conversion by simply filling out some paperwork with your IRA administrator or your financial professional. It is important to note, though, that you do have to pay taxes on the amount that is being converted out of the traditional IRA. That could create a sizable current tax obligation. However, that cost could be worth it if it creates tax-free income in the future.
Interested in exploring a Roth conversion for your IRA assets? Let’s discuss it. Contact us today at Sprouse Financial Group. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
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