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3 Reasons You May NOT Want to Fund a Roth IRA Conversion

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Roth IRAs can serve as a great option for a variety of financial situations. However, we have to remember, converting a pre-tax plan (i.e., traditional IRA, pretax 401(k), etc.) to a Roth IRA will trigger a taxable event. For example, if you convert $25,000 from a pre-tax plan to a Roth IRA, you essentially add $25,000 income to your tax return for that year. So here are 3 reasons why you may NOT want to fund a Roth IRA conversion.

1. Sacrificing Future Investment Growth

The only way you can pay the taxes due on that conversion is with money from your IRA withdrawal. So not only are you sacrificing any future investment growth on the pre-taxed money, there's also the risk that, if you're under age 59-1/2, you'll owe the 10% early withdrawal penalty on that money.

2. Possible Penalty Charge

If you think you'll need the money in five years or less, then it may not be best to convert to a Roth IRA. Money converted from an IRA to a Roth IRA falls under a Roth five-year rule: if you don't wait five years to withdraw it, you could owe taxes and a 10% penalty.

3. Higher Tax Bracket

The withdrawal from your IRA will push you into a higher income tax bracket. It's generally a good idea to convert just enough so that you're not pushed into paying a higher tax rate that year.

If you have any questions or would like to discuss your financial plan, click here to schedule a quick chat today.

Disclosure: All individual situations are different. Consult with a tax advisor before making any decisions regarding Roth contributions or conversions.

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