I'm considering a Roth conversion. How should I decide whether this is a good idea for me?

Talk to your tax accountant.

In a conversion, you move money from your traditional IRA into a Roth IRA.

The advantages: By reducing your traditional IRA, you reduce your future required minimum distributions (RMDs), which are taxable. Roth IRAs have no RMDs. Roth withdrawals are tax- and penalty-free after you're 59½ years old and have owned the account for five years; and unlike RMDs, they don't count as income in the formula that determines your Medicare premiums and the tax treatment of your Social Security benefit.

The cost: The amount you convert is added to your 2020 taxable income. You can convert up to $20,000 and incur only a federal income tax on your conversion, however, because New York doesn't tax up to $20,000 of annual retirement account income.

The key question: How soon after the conversion will you come out ahead financially?

The answer depends on the Roth's future investment earnings and on how long you can leave it untouched, relying on other sources of income to cover your expenses. You can't come out ahead if you must take Roth withdrawals at a faster rate than the account grows. It also depends on whether you can pay the tax on the conversion from a non-retirement account. Let's say the federal tax on your $20,000 conversion is $3,000, for example. If you can pay it from a non-retirement account, you can deposit $20,000 in the Roth. If the $3,000 must come out of your IRA withdrawal, leaving only $17,000 to put into the Roth, it's harder to come out ahead.

The bottom line

Talk to your tax accountant about the pros and cons of a Roth conversion in your specific situation.

More information

investopedia.com/roth-ira-conversion-rules-4770480

fairmark.com/retirement/roth-accounts/roth-conversions/conversion-consequences/

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