Taxes are one of the most important things to consider when it comes to your retirement. You’ll likely have several sources of income in retirement that can be taxed, such as IRA distributions and Social Security benefits. But is your income tax-advantaged? A tax strategy for retirement income can help reduce your tax bill.
When money is distributed from a Traditional IRA, it’s taxed as ordinary income. In contrast, a Roth IRA is taxed with post-tax dollars. A Roth IRA can be a great asset in retirement due to its tax-free distributions, unlike traditional IRAs.
Those who are able can only contribute up to $6,000 per year if under age 50, or $7,000 per year if over age 50. But as you may know, people with income over $144,000 and couples with income over $214,000 cannot contribute directly to Roth IRAs. However, you can undergo a Roth IRA conversion to take advantage of the tax benefits of a Roth IRA.
Anyone has the option to convert any amount from a Traditional IRA, 401(k), or similar qualified retirement account into a Roth IRA or 401(k), regardless of income level. If your income strategy doesn’t include tax minimization, consider asking your financial advisor about a Roth conversion.
If a Roth conversion sounds like it could work in your retirement plan, you would pay tax on what you convert and then be able to withdraw money tax-free later. Make sure it’s the right decision for your retirement before using this strategy because Roth IRA conversions are irreversible, meaning that it’s subject to regular Roth IRA limitations: Money can’t be withdrawn penalty-free until five years after it’s converted, and typically not until age 59 ½.