Convert Your IRA to Supercharge Your Retirement Savings

Americans are utilizing the retirement savings features of IRAs more than ever. However, Roth IRAs are still underutilized, due in part to a misunderstanding of how the vehicle can be strategically used for retirement planning.

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While you can make annual after-tax contributions to a Roth IRA if you meet a certain income threshold, it is not the only way to get money into a Roth IRA.

One underutilized feature is the Roth IRA conversion, which can provide a variety of benefits such as reduced risk of rising taxes and the ability to better control taxes on Social Security benefits and Medicare premiums, all of which can lead to more retirement security. The one benefit that most don’t appreciate is that paying taxes on the conversion is equivalent to making contributions to a tax-advantaged retirement plan.

Let’s take a look how Roth conversions work and when they can be an effective tool to supercharge your retirement savings.

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TAX-FREE GROWTH

First, when an IRA or 401(k) is converted into a Roth IRA, the participant pays taxes on the value of the taxable portion of the account on the date of the conversion. This increase in current taxes scares a lot of people away, including accountants, who often think in terms of deferring taxes as long as possible.

So why would you want to increase your taxes today by engaging in a Roth conversion? Growth in the account after the conversion will be tax-free as long as certain qualification requirements are satisfied. Also, unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions at 70½.