Beth Pinsker: Will you regret that Roth IRA conversion when you get a huge tax bill?

by | Apr 10, 2023 | Stock Market

If you took advantage of the down market in 2022 to convert some of your IRA to a Roth, you’re about to get a reality check of how much that will cost you when you file your tax return. Tax-saving strategies can sound good in theory, but you might feel differently when you see the actual bill.  “Sometimes it’s a hard sell, because they’re paying taxes they wouldn’t otherwise. Even if you show them over a lifetime that they’re saving money, they’re hesitant,” says Kenneth Waltzer, a certified financial planner based in Los Angeles. Since you can no longer take back Roth conversions like you previously could with a “recharacterization,” you need to be sure of your financial decision.

Roth conversions are mostly the concern of those with large IRA or 401(k) balances who have other funds to cover living expenses in retirement. The Roth conversion strategy entails moving as much as you can out of tax-deferred accounts before you start required minimum distributions, which is now age 73. It’s common to start as early as 60, when you might be transitioning to retirement or have the financial ability – maybe you’re done paying for college, the house is paid off or you’re simply making more than you spend.   Most people take a multiyear approach to spread out the financial burden, being mindful of where they fall in the income parameters of their tax bracket. “We figure out the most they can take and not go into the next bracket,” says Waltzer.  From there, it’s a matter of pacing it out. If, for instance, you have $1 million saved for retirement in a 401(k), you might start moving $50,000 a year into a Roth at age 60. By 73, you might only have about $350,000 left in the account, depending on market performance. Your RMD w …

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