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Is a Roth Rollover Right for You?

March 12, 2021

The current tax environment and impact on household income due to COVID-19 has increased opportunity for Roth conversions. Roth conversions can be a great tool for reducing future tax liability because of their tax-free distributions. While this strategy might not be for everyone, here are some reasons to consider a Roth conversion this year:

Current federal income tax rates

When you convert funds from a traditional retirement account to a Roth IRA, you only pay income taxes on the funds in the year you roll the money over. After that, it’s never taxed again. Right now, federal income tax brackets range from 10% to 37%, lower than they’ve been over the last few years, thanks to the Tax Cuts and Jobs Act (TCJA) passed in 2017, set to expire at the end of 2025.

Potentially lower tax bracket

If you’ve experienced a reduction of income or job loss in 2020, you may have dropped to a lower income tax bracket.  That could mean paying even less tax on funds converted to a Roth IRA.

Reduced financial liability during a market downturn

A market downturn may be beneficial if you decide to convert from a 401(k) to a Roth IRA. You pay taxes on the balance that you’re reclassifying. A lower account balance could mean lower taxes. Plus, Roth IRAs usually feature a broader investment universe than 401(k) plans, and your distributions would be tax-free.

There’s a lot to consider when determining whether a Roth conversion may be right for you. The deadline for a Roth conversion is December 31st, so if you think this may be a good option for you let’s connect soon.