Blood pressure falling . . . back . . . to normal.
With a Roth IRA, you get no tax-deduction for the money you contribute . . . but neither do you pay any tax on the money you withdraw. (There’s also less paperwork and more flexibility.) As a result, many people have toyed with the notion of converting their traditional IRAs to Roth IRAs. It often makes sense.
(The scenario in which it would not is if you are in a high tax bracket now, and expect to be in a very low one as you withdraw the money. I say: fat chance. But if you did expect to be in a very low tax bracket as you withdrew the money, the tax benefit of the Roth IRA would be correspondingly low, and would probably not justify giving up today’s tax deduction.)
You don’t have to convert by any special deadline. But if you were thinking of converting, this could well be a better time to do it than, say, this time last year. For two reasons:
- First, your IRA may have shrunk in value with the stock market. If so, there will be less money to convert and, thus, less tax to pay on the conversion. Later, when it bounces back, all that bounce-back will be free of tax.
- Second, it looks as if tax brackets themselves are likely to come down this year – so the tax you’ll owe may be lower still.
Of course, if the bear market has further to run, as it probably does, you might want to wait still longer to convert. And if some of the drop in tax brackets winds up being phased in over time, that, too, would be a reason to wait. But clearly, this year would be a better time for most to convert than last year – even if it proves not to be as good as, say, next year.
(You could always waffle, converting some now and – if the value of your traditional IRA falls further – the rest later.)
For Vanguard’s worksheet on Roth IRA eligibility and conversion, click here.
And don’t forget that the deadline for contributing this year to either kind of IRA (as opposed to converting, for which there is no deadline) is Monday. (Monday – oy! — is also the deadline for filing YOUR TAXES! Or at least your Form 4868.)
Quote of the Day
In 1800, 75% of [an American's] working man's expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%.~The Wall Street Journal, September 20, 1996
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