Fidelity Investments, one of the world’s largest asset managers with $7.9 trillion in assets under administration, has seen Roth IRA conversions surge 76% in the first quarter from a year ago, according to a spokesperson for the Boston-based financial services company.
This raises the question should I gradually convert my retirement savings that are in traditional retirement accounts to a Roth IRA?
Note: A Roth Conversion is when you transfer money out of your traditional retirement accounts where your taxes are being deferred and move the money to a Roth IRA so that it can grow tax free
The Truth is that although this would mean paying taxes now on your balances doing so could have long term benefits as it will allow all your money afterward to grow tax free.
Reasons to consider a Roth Conversion in 2020
1.Stock market Loss
This one is kind of sad but if you have lost money while the market is down and you are planning to ride it out until it goes up it might make sense to pay taxes now on your lower balances before you take the hopeful ride back up.
2.You agree that taxes are likely going up
Even before the current crisis many economists believed that taxes were going to go up.
The debt our country is in is a major reason for that. But when you factor in the 2 trillion-dollar stimulus package that was just provided to millions of people it is reasonable to expect a rise in taxes in the future. Tax deferred accounts could be sitting time-bombs for taxes.
3.Your income is lower
2.4 million Americans filed for unemployment in the month of May 2020.
In addition to that pay cuts, furloughs and early retirements may have reduced the income of many. If that is the case for you this may be the perfect time to pay taxes on your traditional IRA because you might even be able to stay in the same tax bracket while doing so.
Additional reasons why Roth Conversions Might make sense in any year.
If you like the idea of your investment earnings growing tax-free.
If you want the ability to lower your taxable income in retirement.
If you think maybe your tax rate in retirement will be higher than it is now.
If you want to avoid required minimum distributions, which the IRS mandates at age 72 from a traditional IRA.
Conclusion:
Roth conversions are used to reduce the amount of money a person will pay in taxes during retirement so that you can keep more of your savings for you. As always: Before you decide to do a Roth conversion it’s best to consult your financial advisor and or accountant to discuss your individual situation.