What’s a Roth Conversion (and Why Should You Care)?

Retirement planning is more than just throwing your extra change into a savings account – it’s about creating a long-term plan tailored to your current lifestyle and future goals. With all of life’s ups, downs and unexpected turns, that can get pretty messy. 

That’s why retirement planning is so important – it accounts for all the craziness you might run into along the way and works to ensure that you’re set for success in every foreseeable circumstance. One of the best tools you can add to your retirement planning kit? A Roth conversion. 

Today, we’re walking through the Roth conversion process from A to Z, as well as reasons why you might benefit from talking Roth conversions with your financial planner. 

Traditional IRAs vs. Roth IRAs

There are several types of individual retirement accounts (IRAs) you can use to save up for your golden years, each with their own rules and benefits. The two most common types of retirement accounts are traditional IRAs and Roth IRAs. 

A traditional IRA, such as a 401(k) you’ve opened through your employer, is invested with pre-tax dollars. This means that the money you contribute to your traditional IRA may be used as a tax deduction and that amount won’t be taxed immediately. Rather, you’re taxed when you start making withdrawals in retirement – at whatever tax rate you fall into at that time. 

On the other hand, a Roth IRA is taxed the moment you invest in the account. Although you’re paying taxes on that money now, you’ll get to withdraw that money in retirement (and any gains you’ve accrued over the years) totally tax-free – assuming the account is at least five years old. You typically open a Roth IRA independently from your employer. 

What is a Roth Conversion?

Say you wanted to take money from your traditional IRA and put it into your Roth IRA – no one would ever want to do that!

Just kidding – that’s actually super common, and it’s called a Roth conversion. 

A Roth conversion is a fancy way of saying you’re transferring money from a different retirement account into your Roth IRA. One thing to keep in mind: you haven’t paid taxes on that cash yet, and the IRS is definitely taking notice. All that money you just “converted” into your Roth IRA will be taxed as income for the year in which it takes place. 

Anyone can do a Roth conversion, and there’s no limit to how many of these transactions you can make – just be aware that a Roth conversion can’t be “recharacterized” – meaning there’s no undo should you change your mind later on.

When Does a Roth Conversion Make Sense?

A Roth conversion might be a good choice if you’re in a lower income bracket than previous years – especially if you expect your income to go back up again in years to come. With the Covid-19 pandemic affecting nearly all job sectors, many people found the silver lining in layoffs and pay cuts through Roth conversions.

If you’re planning on passing on big bucks to your heirs after you pass away, a Roth conversion also allows you to pass on tax-free assets. And if you decide to hang onto the money into your retirement years, you also won’t be hit with any required minimum distributions (RMDs) after the age of 72.

Ask the Experts

There are many rules and regulations surrounding Roth conversions, like further tax implications in later years. If you think a Roth conversion might be right for you, it’s probably best to connect with a financial advisor or tax planner before you make the leap. 

Whether you’re planning for your own retirement or hoping to leave a nice lil’ nest egg for those cute lil’ grandbabies, a Roth conversion might just be the perfect tool for you. 

Start the Conversion Conversation with Lasso

Lasso does more than just let you plan for your financial future (although it’s pretty great at that, too) – you can also use the app to browse advisors. Find your perfect financial advisor through the (totally free) Lasso app today and learn more about how Roth conversions could help you create a stronger financial plan. 


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