Tax rates a rising? Time to switch that pre-tax IRA over to an Roth

taxIf you’re one of the many that foresee personal income taxes rising in the near future to pay for the current Obama administration plans, it may make sense to pay the taxes now, rather than later down the road, and switch your traditional pre-tax IRA over to a Roth IRA. There are likely multiple variables that should go into your decision, including, but not limited to:

  • Do you anticipate having more income in retirement, hence higher taxable income than now?
  • What about tax rates now versus the future?
  • If you anticipate your income will increase and or tax rates will increase in retirement, and you’ve recently realized significant losses, it surely makes sense to match the switch now – as the cost of doing so is much lower.
  • You may be better off leaving your investments alone and allowing the pre-tax dollars to grow to their fullest potential if you think tax rates and or your income in retirement will be lower,  you should choose to pay taxes when you withdrawal at retirement.

Who’s eligible to convert pre-tax IRAs to Roth IRAs?

  • Your taxable income must be lower than $100,000 to qualify.

Don’t forget:

  • If you’re under 59 and 1/2, you may be required to pay a 10% early withdrawal penalty.

Only you and or your financial adviser can work out your situation and make the best choice for your situation. It only makes sense to do the math, otherwise you may be leaving money on the table, or worse, losing it to taxes when you could have avoided it.

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