Apr 30, 2022
The theme this week on the Retirement Quick Tips Podcast is: Does It Matter When You Convert To a Roth IRA or 401k?
Today, I’m tying everything together and explaining my favorite Roth Conversion Strategy. This week’s theme asks the question: Does It Matter When You Convert To a Roth IRA or 401k? And today, I’m going to answer that question now that we’ve looked at it from a bunch of different angles.
The principles here with a Roth conversion timing strategy are based on maximizing the amount you convert for a given year by minimizing the taxes.
That’s why converting when your IRA is at a loss or at the beginning of the year before you’ve had much growth for that year, both make sense.
So let’s start with the most timely issue right now considering that as you’re listening to this podcast, your portfolio is probably down for the year.
Let’s say you decide that in 2022, you want to convert $100,000 of your Traditional IRA to your Roth. The lower the IRA account drops, the more a conversion makes sense since the same $100,000 conversion that you might have made in a given year, now represents a larger % of your IRA account that gets converted to Roth.
My favorite Roth conversion strategy is one that is flexible and takes advantage of market volatility. This strategy would involve spreading out your conversions during the year. For peace of mind and knowing more about your income, your tax situation and your ability to pay the taxes on your conversion, you could wait to convert a portion until the end of the year, but also convert some at the beginning of the year.
I like this approach the most, because it allows you to take advantage of potential market declines during the year. For example, let’s say you decide this year to convert $100,000 to a Roth, and you already did a $50,000 conversion in January. If your IRA is down 10% this year, now would be a good time to convert say another $25,000 now. Then you could wait to see how things play out over the rest of the year. If your account continues to drop, maybe you accelerate those conversions and do the rest of the conversion if your IRA drops 15-20% at some point during the year. If that doesn’t happen or if the stock market stabilizes, you could wait until later in the year.
Again the goal is to maximize the % of your IRA dollars that get converted to a Roth with minimal tax consequences, and having a flexible strategy that converts dollars at different times and circumstances during the year will help to maximize the retirement assets that are in your Roth.
The key is to have a plan. I find that very few people take the time to just find out if a roth conversion makes sense, even though a well-executed Roth conversion strategy could result in hundreds of thousands of additional dollars by the end of your retirement years. Retirement dollars that won’t be taxable for your heirs either.
So here’s what a Roth conversion plan looks like:
That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.
----------
>>> Subscribe on Apple Podcasts: https://apple.co/2DI2LSP
>>> Subscribe on Amazon Alexa: https://amzn.to/2xRKrCs
>>> Visit the podcast page: https://truenorthra.com/podcast/
----------
Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance