You may have heard of the concept of a “Roth Conversion” but aren’t too sure how it works and why it’s beneficial. What is a Roth conversion? How does it work? And what are the benefits of converting your retirement accounts to a Roth account?
Furthermore, we’ll discuss how a Roth conversion applies to the CARES Act and the SECURE Act, something few people are aware of!
Unlike other qualified retirement accounts such as the 401k or the Traditional IRA, Roth IRA’s allow you more accessibility options. You can withdraw the money at any point in time without having to pay the traditional 10% penalty. And, if you withdraw your principal (not the growth portion), you don’t have to pay taxes either.
This may come in handy in the event of an unexpected life event that causes severe financial stress, or should you choose to retire early and need a source to draw money from until you reach retirement age.
Lower Your Taxes for The Future
One thing that you’ll grow to hate more than anything else financially when you hit retirement is taxes. Taxes are one of the biggest problems for those in retirement who didn’t plan properly. They get their retirement check from their hard-earned money and end up passing on a large chunk of it to Uncle Sam.
When using a Roth account, you eliminate the tax problems that you’d otherwise have. Your Roth retirement account grows tax-free and allows for tax-free withdrawals in retirement. You are paying taxes on the contributions today so that you don’t have to pay the taxes on withdrawals in retirement.
No Required Minimum Distributions
A required minimum distribution (RMD) is the amount required to withdraw from your retirement funds when you are of retirement age at 72 years old. Required minimum distributions are enforced for traditional IRAs, SEP IRA’s and SIMPLE IRAs but do not apply to Roth IRAs.
How A Roth Conversion Applies to The CARES Act and the SECURE Act
The CARES Act, passed by President Trump in March 2020 in reaction to the COVID-19 pandemic and put into action to help people financially during a stressful time, has an added benefit in that it suspended required minimum distributions for IRA’s altogether. This makes Roth conversions a desirable option for those who have IRAs that also mandate RMD’s.
The SECURE Act was passed in December of 2019 by President Trump to aid people in having more access to their retirement as well as aid people in retirement planning. A new rule, as defined in the SECURE Act, is only requiring that beneficiaries of inherited Traditional IRAs have to empty the account within 10 years, rather than take required minimum distributions.
This means that the beneficiaries of traditional IRA’s have an excellent opportunity to convert it to a Roth IRA and take advantage of the many benefits of Roth accounts as described above.
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