Market Capital Management

Tuesday, December 16, 2014

When is it a good idea to pay the tax?


Who really enjoys the US tax paying process?  Most of us would not volunteer to pay more taxes than we owe.  But in some cases it may be a good idea to pay more tax this year.  How about if you could pay no taxes later? Converting your Traditional IRA to a Roth IRA may allow you to do just that!
A Traditional IRA defers a portion of income before taxes to an account in which the principal and growth are tax deferred until the saver withdraws the money in retirement.  The idea is to delay paying taxes now when the saver is in a high tax bracket and wait to withdraw the funds in retirement when the saver is presumably in a lower tax bracket.  A Roth IRA works differently in that the saver pays the tax on the income now but withdrawals the money in retirement tax free.
 
When to consider a Roth IRA conversion ?

1.        Tax bracket this year?  If you are in a high tax bracket or if the additional income from the conversion pushes you into a higher bracket it is generally not favorable to convert to a Roth IRA.  However, if for you are in low bracket this year it may be a good idea.  For example, if you were laid off during the year and your taxable income is significantly lower a Roth IRA conversion might make sense.  If you have substantial tax deductions such as medical expenses which lower your income a Roth IRA conversion may be right for you. 
 
2.       Tap current IRA funds in the next five years?  Generally, you must wait five years to tap any of the gains from your Roth IRA.  If you may need the IRA funds a Roth IRA conversion may not be right for you as you may end up paying taxes twice on the same funds.

3.        Time until retirement?  A long time horizon can make the conversion to a Roth IRA a better idea.  The longer your savings can accumulate tax free the more savings you should accumulate. 

Use our Roth IRA Conversion calculator on our website at www.marketcapitalmanagement.com and to determine if a Roth IRA conversion is right for you.

We would love to hear what you think. Feel free to follow our blog, give us a call or email us…until next time

John H. Heil, Senior Financial Blogger
 
This information is for general purposes only. This information is not intended to be a substitute for specific professional financial advice. Please see a financial professional in regards to your own individual situation.

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