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Tax Changes Make Roth IRA More Appealing

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).
 If you'd like a primer on IRAs, I recommend Vanguard's website as a source of great information.

Click here to view Vanguard's IRA comparison site.

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.