Consider Converting to a Roth IRA

The first question is deciding if converting your Traditional IRA or 401K to a Roth IRA is a good idea. The benefits include tax and penalty-free distributions, both of which generally kick in once you’re 59 and have met the five-year holding requirement. In addition, Roth’s offer estate planning advantages. For example, unlike traditional IRAs, you’re not required to withdraw specified amounts from a Roth each year once you reach age 70. The same is true when your spouse inherits the account as your designated beneficiary.

The conversion to a Roth does have a cost. When you have no basis in your traditional IRA—for instance, you deducted your original contributions on prior tax returns—you’ll have to add the entire amount converted to your taxable income. That’s a reason to start planning now, since the increase in income could have tax and nontax implications, such as reducing itemized deductions or affecting college financial aid.

There’s another way tax rates can affect your decision about converting. Say you intend to relocate to a state with low or no income tax, and you expect the move to reduce your overall tax rate. In that case, you may decide to delay or forgo making a conversion.

I’ve got one final tip. If your income in 2023 was more than $153K ($228K if married), you’re not eligible to make a regular 2023 Roth “contribution”. Your only option therefore is to make a contribution to a non-deductible “traditional IRA”. You could subsequently immediately convert your 2023 traditional IRA contribution to a Roth IRA and pay no taxes on the conversion since your basis (the amount of your contribution) will likely be equal to the amount you converted. It’s a nice little work around that essentially enables you to accomplish your goal of funding a Roth IRA.