Roth Conversion Timing

Let’s talk about Roth conversion timing. When you’re trying to time the market that can be an impossible task. And so you want to look though potentially at the idea that if you’re seeing your IRA, traditional IRA down in value and you think, well maybe the market is at a lower point than I think it might be a year or two or three years from now. Then that might be the ultimate time to look at converting a portion of your traditionally IRA over to Roth IRA. Now there’s a lot of different things to be factoring into this such as taxation and where your income stands. But I want you to be thinking about that when you’re seriously looking at doing a Roth conversion and trying to figure out when the right time might be. So when it comes to paying your taxes, ideally you want to be paying the tax from an after-tax account. So if you were to convert $20K from your IRA over to Roth IRA and let’s just use for example that your tax liability is $3500 in that example. Ideally, you’d want to pay that from the after-tax account. So that way your $20K that you converted is still $20K in your Roth IRA. But you can, if you don’t have that money sitting aside in an after-tax savings account as an example, then you can always have the taxes withheld from your IRA when you transition or convert that over to Roth IRA. So in that example, the $20K, withhold the $3500 for federal and state taxes and now you have $16,500 in Roth IRA. But now it’s tax-free and the growth will be the tax-free as well. You want to be careful with this though. If you’re under age 59.5 and if you’re wanting to do a Roth conversion, you can do that Roth conversion. But as far as withholding the taxes from the IRA to pay that, you may be exposed to a 10% early withdrawal penalty. So in a situation like that, ideally again, you’d be paying the tax from an after-tax account. One of the terms that we always talk about on the show here is tax bracket optimization. With that we’re essentially saying if you’re in a position where let’s imagine you’re a married couple in the 12% tax bracket. But maybe you have room of another $20K as I continue to use in this example where you would still be in the 12% tax bracket. Well maybe it makes sense to fill out that 12% tax bracket by doing a Roth conversion. And if you’re younger than age 59.5, you know when does it make sense there? Well if your income is lower perhaps and if you anticipate well, my income is going to be higher down the road and maybe in a higher tax bracket. Maybe it makes sense to convert now when you’re in a lower tax bracket. And then you get the benefits of the tax-free growth. So Roth conversions are definitely something you’d want to sit down with us. Have a conversation and better understand if that makes sense for you.