With the downturn in the market these past few months, there is increasing talk about the pros and cons of converting an existing diminished IRA account into a Roth IRA. Both types of IRAs are designed to help you save for retirement while providing a tax advantage, but they do so in different ways. We thought it might help you to understand the difference.
With a traditional IRA, you pay the tax due when you withdraw the funds, and with a Roth IRA, you pay the tax due on the funds you contribute. This way, the withdrawal amount later on is tax-free. This means that if you convert your traditional IRA, where you’ve been investing pre-tax dollars, into a Roth IRA, you will need to pay the full tax due during the year that you make the conversion. This may be less than you think, however, because you have less money to withdraw due to the market downturn.
That retirement money will then be in a Roth, where you’ll invest those dollars to grow tax-free. And, you can make withdrawals in the future on a (hopefully) greater amount, also tax-free. Call us, we’re always here to help you navigate rough times.