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Why Not to Convert to a Roth

Why Not to Convert to a Roth

Roth IRAs are taxed when you contribute to them instead of when withdrawals are made. You can also convert Traditional IRA assets to Roth IRAs. This makes less sense if;

1. Your tax rate will be lower when you withdraw the money.
Compare the tax rate you’ll be paying on the converted IRA assets versus your future top marginal tax rate. Most investors’ “retirement” tax rate will likely be lower than their “working” tax rate.

2. You’ll be withdrawing the money within 5 years.
The rules get complex, but if you’ll need the assets within 5 years you need to learn the “5 Year Rules”.

3. You don’t have the cash to pay taxes
Although withdrawing assets from the IRA is an option, this decreases the benefits greatly. There are free basic calculators online to determine if you should convert. For larger portfolios more sophisticated calculators available for purchase or through a financial planner are worthwhile.

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