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Save Money by Converting to a Roth IRA Right Now

The country has plunged into difficult financial territory with the recent COVID-19 outbreak. We have been through this territory before with the Great Recession over a decade ago and the economic struggles post-9/11. Each time, patient investors have found their investments come roaring back after the rockiness.

But if you want to do something proactive during this bear market, consider converting your traditional IRA to a Roth IRA. This one simple change could save you lots of money in the long term.

What Is the Difference Between a Roth and Traditional IRA?

The biggest difference between a traditional and a Roth IRA is notable at tax time:

  • You deduct the contributions you make to a traditional IRA at the time you make them

  • You pay no taxes on your Roth IRA when you make withdrawals in retirement

Most financial advisors will ask this question when you open an IRA: Do you imagine your tax rate will be up or down in the future?

The answer usually guides your choice. Those who anticipate a higher tax rate when they retire are encouraged to open a Roth IRA, while those who think their tax rate will go down pick a traditional IRA.

Why Convert to a Roth IRA Now?

Sometimes people choose a traditional IRA only to realize a few years later that they would have been better off with a Roth IRA. But they don’t want to change because the value of their IRA has grown, and they would have to pay high taxes when converting it.

Here’s the advantage of making the change during a bear market. The worth of your IRA has fallen, and so when you make the switch, the amount you are taxed will be lower, too. Your tax bill for your Roth IRA will depend on how much money you put into it now.

You will see substantial investment gains over the life of your Roth IRA after you make the switch, more than balancing out the tax bill you have to pay. Plus, once you reach retirement, you won’t have to make tax payments on your withdrawals.

Tax Benefits From COVID-19 Relief

Not everyone has the money sitting around to cover the tax payments you would incur by converting your Roth IRA, especially if you have been saving for years. But here’s some further good news.

The recent COVID-19 relief legislation passed by the federal government also provided a clause for investors. You can remove up to $100,000 from your investment funds for free, without facing penalties for early withdrawals. Savvy investors can fund their Roth IRA conversion with that money, meaning it won’t cost them anything out of pocket, at a time when most people want to hang onto their savings.

We usually don’t recommend early withdrawal of retirement savings. But in this case, it makes sense because of how much you can save down the line.

Are you interested in converting a Roth IRA, or do you have other questions about retirement savings? Contact Jay to set up a discussion.

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