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Silver Lining for your IRA: Roth Conversion

Updated: Feb 20, 2023

2022 was a tough year for investors. Your retirement savings may have taken a huge hit. However, there can be a silver lining if you are planning to convert your traditional IRA to Roth IRA.

Sun glimmering behind cloudy sky
There may be a silver lining to your retirement planning if you convert your traditional IRA to Roth IRA.

IRA stands for Individual Retirement Account. Given our government would like to encourage individuals to use IRA accounts for their retirement savings, IRAs receive tax-advantages over putting your savings in your taxable brokerage account. The government does impose an annual limit on how much you can fund your IRAs. It also imposes a penalty when you withdraw before the age of retirement.

There are 2 types of IRAs, Traditional IRA and Roth IRA.

Traditional IRA

Traditional IRA lets you contribute your pre-tax earnings into the retirement account. The account should grow between now till your retirement. The government will then tax you, in general a lower tax rate, when you withdraw your funds at the age of your retirement.

Roth IRA

Roth IRA lets you contribute your post-tax earnings into the retirement account.The account should similarly grow between now till your retirement. Because you were taxed when you contributed money prior, the government will NOT tax you when you withdraw your funds at the age of your retirement.

At first glance, they look like 2 sides of the same coin: pay taxes now vs. in the future. Why would one have preference on one over the other? The preference lies on whether the government would increase the amount they would tax in the future. With our record debts and ever stretching medicare and social security program, many believe the US government will increase taxation in the future. Because of this, many suspect they will have a larger retirement income with Roth IRA.

Given the potential advantage of Roth IRA, many would ask whether they can convert their retirement account from Traditional IRA to Roth IRA in order to reap the benefit in the future.

The answer is Yes. However, you will have to pay income tax now on the amount you will convert. This is a stumbling block for many and stops them from realizing the potential benefits from Roth IRA.

This is where the silver lining of 2022 comes in. If your traditional IRA account has declined, converting the account to a Roth now will minimize your long-term tax bill. And you will not need to pay taxes when you spend the money in retirement.

Final thought.

If you are interested in talking to a professional about converting your Roth IRA or other financial questions you may have, the Peak Wealth Planning team can assist.

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About the Author

Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.

Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.


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