Why Roth Conversions Might Make a Sense Now
Why Roth Conversions Might Make a Sense Now, The market pullback that many experts predicted would last year finally arrived in 2015, leaving many investment and retirement portfolios with much lower balances. If your income plans and retirement plans are going downhill this year, then this could be a great opportunity to move some money around. Now could be the time to change some or all of your traditional IRAs or plans that qualify for a Roth account. This simple strategy can help you weave a silver lining from a financially mediocre last year.
Procedure
Roth conversions have become much easier to achieve since Congress lifted the aggregate income limit for this procedure in 2010. This means that taxpayers can now convert traditional or Roth IRAs of size in any given year regardless of the amount of income generated. However, that doesn’t mean that it’s always wise to change traditional plans or account balances all at once, or right away. If your income will decline in the future, it may be best to wait until the time of conversion so you may be in a lower tax bracket. (For more, see: Pros and Cons of Creating a Backdoor Roth IRA.)
But if your income has fallen this year due to job loss or other circumstances, then now could be an ideal time to generate additional taxable income. This can be a wise move if it looks like you will have a credit or deduction that would otherwise go unused.
For example, if you are married with two children and your normal annual income is around $60,000 and you lost your job in February and have been collecting unemployment benefits for six months, then you might get out by turning it into a traditional $30,000 IRA that you rolled out of. your last job. If you do that, then you probably won’t be paying a lot of income tax on the conversion, even if it’s a taxable event. If your total income from conversions, your two months of work, and your unemployment benefits makes a total of $50,000, then you can cut that amount at least in half when you do your taxes, as you can deduct two personal and two exemptions depending, DMI
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