Quick Review on IRAs:When you save into a Roth IRA, you save money you have already paid income tax on, and don't pay income taxes when you withdraw it at retirement.
When you save into a Traditional IRA, you save money that has not been subject to income tax, and you pay income taxes on that money when you withdraw it.
Now to the point of this post: with the recent changes in tax brackets, have you reviewed your IRAs?
If your tax bracket has changed for the better (assuming that you prefer to pay less of your hard earned income in taxes and consider a lower bracket a "good" thing), it's possible that converting your Traditional IRA to a Roth might make sense for you. What exactly should you consider?
- Consider what your retirement income level will be, so you know what tax bracket you're looking at during that time compared to your current bracket.
- Calculate how much tax you'll pay on your traditional IRA funds at the time of distribution (this will be based on your income at the time).
- Calculate how much tax you'll pay on your traditional IRA funds if you convert now.
- Remember that Traditional IRAs require minimum distributions beginning at a particular age (affecting your tax liability with increased income), but that Roth IRAs do not require withdrawals during your lifetime (also affecting your tax liability with income with more flexibility).
One final thought: the current tax rates are set to expire after 2025 if no further action is taken by Congress. With that in mind, if your tax bracket has lowered, converting traditional IRAs to Roths becomes an even more appealing idea.