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When to Consider a Roth IRA Conversion

When to Consider a Roth IRA Conversion Fitzwilliams Financial

If you find yourself with a traditional IRA account for your retirement, it can occasionally be useful to convert your account to a Roth IRA. The key difference between these accounts is that a traditional IRA is taxed when it is withdrawn, whereas a Roth IRA is taxed before the money is put into the account.[1] Because the Roth IRA offers you tax-free withdrawal, the strategy of converting a traditional IRA to a Roth IRA might be worth considering. So much of retirement planning is about managing your tax burden, and this might be a technique that can help you to optimize for the best tax situation. Every individual is different, but let’s take a look at why someone might consider this strategy.

Many people assume that because they will no longer be working, their income bracket will be lower when they retire. This can be true, but it isn’t always the case. Because a traditional IRA withdrawal will be taxed at your income rate, it’s very important to have a good sense of what tax bracket you might be in during the years you withdraw from a traditional retirement account.[1]

If your tax bracket during your late retirement years will be close to the same as your working years (or even higher in some cases), then a Roth conversion might be something you should consider. As a hypothetical strategy, you might move some of the money in your traditional account to a Roth account during the early years of your retirement when you are not withdrawing Social Security and are not burdened with RMDs. The idea is that while your income is lower, you can take the tax hit for converting some of your funds to a Roth IRA. Then, your funds could grow without having to worry about paying taxes when you withdraw. Again, this strategy is not good for every situation. There are a lot of factors to consider when making this kind of financial move.

Your timeline of retirement planning is filled with complexities and strategies like this one. They might be great for you, or they might be suboptimal – but it really depends on your situation. If you are looking for someone to help guide you through the process of designing a personalized retirement plan, feel free to reach out to us today for a complimentary review of your situation.

 

When consumer confidence hits a multi-decade low, it is completely natural for you to feel a sense of hesitation about your hard-earned savings. If you are approaching retirement, seeing prices rise while trying to figure out the right time to adjust your portfolio can feel incredibly stressful. However, this low confidence might actually be introducing a healthy dose of critical thinking into the market right now. Instead of rushing into investments out of a fear of missing out, I am seeing people take their time to analyze their moves before they act.

This deliberate pace could be a vital asset as we prepare for what might be a historic three trillion dollar wave of tech IPOs. The names hitting the market are incredibly popular, and the media hype may make you feel like you need to change your entire strategy to get a piece of the action. But we must look closely at the underlying reality: many of these massive firms are not yet profitable. The typical corporate fundamentals simply are not there yet.

Because of this, I believe you should treat these speculative assets with extreme caution, much like money you would take to Vegas. If you want to participate, you might consider limiting that exposure to no more than five percent of a well-diversified portfolio. You should never dismantle a carefully crafted, long-term retirement plan just to follow a market trend. Furthermore, you must realize that extreme trading volumes during these public launches could cause your orders to execute at vastly different prices than you originally intended. It pays to be patient and let the dust settle.

If you have questions about how these shifting market dynamics might apply to your personal retirement plan, our team is always here to help.

Key Takeaways

  • A drop in consumer confidence may encourage a healthier investment environment by forcing individuals to rely on critical thinking instead of emotion.
  • An upcoming wave of massive technology IPOs might generate significant media hype, but these companies may lack current profitability and traditional business fundamentals.
  • Investors should avoid allocating more than five percent of a diversified portfolio to highly speculative, unproven market assets.
  • Heavy trading volume during a major public offering could cause investment orders to execute differently than an investor expects.

Fitzwilliams Wealth Management, Inc. is an SEC registered investment adviser. FWM and Fitzwilliams Financial are affiliated companies. This content is for informational purposes only and should not be construed as personalized investment advice. We do not provide tax or legal advice. Investing involves risk. Media appearances are for informational purposes only and do not constitute an endorsement.
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