Here are 3 things to consider before doing a Roth conversion | ET REALITY


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As the end of the year approaches, some investors may be considering converting a Roth IRA to save on future taxes. But there are several things to consider first, experts say.

The strategy rolls your pre-tax or non-deductible IRA funds into a Roth IRA, kick-starting future tax-free growth. But you have to plan the initial tax bill.

“Doing a Roth conversion is a major financial decision that carries both short- and long-term implications,” said certified financial planner Ashton Lawrence, principal at Mariner Wealth Advisors in Greenville, South Carolina.

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Below are some key factors to consider before doing a Roth conversion, according to financial experts.

1. Evaluate the short-term tax consequences

While a Roth conversion may offer long-term tax benefits, there is the potential for short-term consequences, Lawrence warned.

Depending on the size of the conversion, you could have a hefty upfront federal and state tax bill, which could deplete your savings or cause IRS penalties without proper planning, he said.

Additionally, increasing your adjusted gross income can create other problems, such as higher Medicare Parts B and D premiums, or losing eligibility for other tax breaks.

2. Consider current and future tax brackets

“Roth conversions are a tax arbitrage,” so it’s critical to weigh current and future tax brackets, said CFP Jeremy Finger, founder and CEO of Riverbend Wealth Management in Myrtle Beach, South Carolina.

Roth conversions are a tax arbitrage.

jeremy finger

Founder and CEO of Riverbend Wealth Management

3. Weigh the moment

“Timing is another crucial factor,” Lawrence said. Generally, a longer investment timeline is beneficial because there is more time for the tax-free growth to offset the initial cost of the conversion.

You can do a screening with a financial or tax advisor to find out the break-even period before deciding whether to convert the funds.

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