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Roth IRA Conversions: A Smart Tax Move in 2022?

Benefits of a Roth IRA Conversion

Tax-free growth and withdrawals. When withdrawals from a Roth IRA are taken after 59 ½, they are free from Federal income taxes as long as the account has been open for five years or longer. You can also withdraw money penalty-free for a first-time home purchase or college expenses.

No required minimum distributions (RMDs). There is no requirement to withdraw money like there is with a Traditional IRA. Therefore, you can leave assets in the Roth IRA longer for tax-free growth potential for your heirs.

No age limit. As long as you have earned income below certain limitations, you can contribute up to $6,000 in 2022. Those age 50 or older can contribution an extra $1,000 each year.

With the market decline in both stocks and bonds this year, many investment account balances are likely lower. During this period, consider a timely tax-smart move: an Individual Retirement Account (IRA) conversion.

Roth IRAs have become an increasingly attractive investment vehicle, primarily because contributions and earnings can be withdrawn free from Federal income taxes. Yet many investors have Traditional IRAs. With a Traditional IRA, contributions are tax-advantaged and deducted from current year income. However, when you withdraw the money in retirement, you pay taxes on that contribution and any earnings and capital appreciation accumulated throughout the years.

By converting a Traditional IRA to a Roth IRA, you pay taxes on the balance now. When the market rebounds and the value of your portfolio recovers, you will be able to enjoy those gains and future appreciation in your Roth IRA account without having to incur Federal taxes when you withdraw the money in retirement.

Keep in mind that since you have to pay income tax on the amount you convert, you need to have enough money to pay that tax bill. If the conversion would result in a large hit to your wallet, you can consider a partial conversion instead of a full conversion to reduce the overall impact.

An Individual Retirement Account is an important part of your overall financial plan. Want to understand more about the important differences between a Roth and a Traditional IRA? Talk to a Jemma Financial Advisor to learn what’s best for you. Click here to start a conversation with us.

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