Roth IRA vs. Traditional IRA

Should you convert your 401(k) or traditional IRA to a Roth IRA?

Roth IRA

The Roth IRA over its lifetime can produce financial results far superior to the traditional retirement plan.

Know how much taxes you will need to pay to convert the Traditional IRA to a Roth IRA.

Here are four reasons you should consider converting your retirement plan to a Roth IRA:

  1. You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free because you invested previously taxed money into the Roth account.
  2. You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (If you make that conversion withdrawal within five years, you pay a 10% penalty. Each conversion has its five-year period.)
  3. When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59-1/2, provided you've had your Roth IRA open for at least five years.
  4. Unlike with the traditional IRA, you don't have to receive required minimum distributions from a Roth IRA when you reach age 72—or to put this another way, you can keep your Roth IRA intact and earning money until you die. (After your death, the Roth IRA can continue to earn money, but someone else will be making the investment decisions and enjoying your cash.)

Here are four reasons keeping your money in a traditional retirement plan or IRA (versus the Roth IRA) can cost you:

  1. You'll generally pay tax and a 10% penalty on withdrawals before age 59-1/2.
  2. You could owe significant taxes when you withdraw your money from your traditional IRA.
  3. Before the SECURE Act, you generally had to start taking required minimum distributions (RMDs) from your traditional IRA or qualified retirement plan in the tax year you turned age 70-1/2. Now you can wait until the tax year you turn age 72. This change applies to RMDs after December 31, 2019, if you turn age 70-1/2 after that date. Once you turn age 72, the law requires you to start taking out money annually-even if you don't need or want it.
  4. If you die and leave a traditional IRA to your heirs, they could owe hefty taxes on the accumulated monies as they take the money from the inherited IRA.

Make sure you have the cash to pay the tax on the conversion to a Roth IRA. Don't invade your existing 401(k) or traditional IRA for the cash to pay the taxes because that is likely to trigger the double whammy of paying both income taxes and the 10% penalty on the withdrawal.

If you are interested in hearing more about our services, we are a CPA firm specializing in tax planning and preparation, virtual CFO services, accounting, and tax resolution.

Book a time here, and let's chat.

Miguel A. Palma, CPA, PFS, CGMA

Founder of Palma Financial Services, Inc.
miguel@palmafinancial.com

Palma Financial Services, Inc. ("PFS")has helped small business owners minimize income taxes and build wealth since 1998.

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