Key Points
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A Roth conversion lets your money grow tax-free in a Roth IRA once it’s moved over.
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You won’t have to pay taxes on your withdrawals or worry about required minimum distributions.
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If you expect to give a lot of your savings to charity, a Roth conversion may not pay.
Roth conversions have become an increasingly popular retirement planning strategy, and for good reason. By moving money from a traditional IRA or 401(k) into a Roth IRA, you pay taxes on the converted amount up front in exchange for tax-free growth in your account and tax-free withdrawals later.
The latter is important, because once retirement arrives, you feel compelled to budget carefully. Not having to allocate a portion of your retirement plan withdrawals to taxes could be huge.
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Plus, with a Roth IRA, you won’t have to worry about taking required minimum distributions (RMDs). You’ll be able to manage your money as you see fit without the IRS telling you that you must withdraw a certain amount each year or else face a costly penalty.
But a Roth conversion isn’t the right answer for everyone. And if charitable giving is an important part of your retirement plans, converting too much of your traditional retirement savings to a Roth IRA could actually cause you to lose out on a valuable tax break.
Qualified charitable distributions can lower your tax bill
If you’re old enough to take RMDs, you’re also old enough to make qualified charitable distributions (QCDs). QCDs allow you to donate money directly from a traditional IRA to a qualified charity.
When you do a QCD, you satisfy your RMD but don’t get taxed on your withdrawal. It’s a great way to support a cause you care about while lowering your overall tax burden.
But if you’re planning to be charitable in retirement, a Roth conversion may not make sense. When you do that conversion, you’ll pay taxes on the money you move into a Roth IRA. But if you’re going to donate that money anyway, you might as well keep it in a traditional IRA and do QCDs.
Think about your long-term giving plans before converting
Roth conversions can be a smart way to minimize RMDs and taxes in retirement. And even if you intend to be charitable, it could make sense to make a partial conversion before RMDs begin.
But if you expect to make substantial charitable gifts throughout retirement, keeping at least some money in a traditional IRA makes sense. So before you rush to convert your entire retirement account, think through your plans and goals carefully.
You may also want to talk to a tax professional for guidance on the best way to balance your tax obligations in retirement with charitable giving.
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