If you’ve been thinking about converting your traditional IRA into a Roth, this could be the year to finally do it.
This type of retirement savings account is appealing because of its tax treatment. A traditional IRA (individual retirement account) is tax deferred — that is, investors receive a tax deduction on the money they contribute, then owe taxes when the money is withdrawn. A Roth IRA allows for the opposite: you pay income taxes on the money you contribute, but then can take it out tax-free.
Millions of workers suffered from job loss and wage reductions this year. If you’re among them, your income is likely lower than in past years, which — since you need to pay income tax on the amount you convert — would reduce how much income tax you pay when making this change.
Keep in mind that you can’t contribute to a Roth IRA if your income is at or over the limit. The Roth IRA income limits for 2021 are $140,000 for single tax filers and $208,000 for married people filing jointly. (A conversion is not the same as a contribution.)
You have to meet specific income requirements to contribute to a Roth IRA, and you’ll also face a maximum contribution limit that varies based on your age.
Roth IRA contribution limits are the same for 2021 as they were for 2020, with consumers who earn a taxable income allowed to contribute up to $6,000 across their IRA accounts. For workers ages 50 and older, an additional $1,000 can be contributed for a total of $7,000 per year.
Keep in mind that not everyone can contribute to a Roth IRA — at least not the full amount. In 2021, married filings with a modified adjustable gross income (MAGI) below $198,000 can contribute the full amount to a Roth IRA.
For couples with incomes between $198,000 and $207,999, the contribution maximum is lowered, while no contributions are allowed at incomes of $208,000 or above.
Single filers or married couples filing separately with a MAGI below $125,000 can contribute the maximum to a Roth IRA in 2021. For incomes between $125,000 and $139,999, contribution limits are lowered, while no contributions are allowed at incomes of $140,000 and above.
Remember that the amount you convert is counted as income, and increasing your income could impact your deductions, credits, exemptions and, — for retirees — taxes of Social Security benefits and some Medicare premiums, Cintorino adds. If you want to avoid a large conversion that will push you into a higher tax bracket, you can convert just some of your account this year, then do more next year.
As your Fresno financial advisor we thought this was a good takeaway: Millions of workers suffered from job loss and wage reductions this year. If you’re among them, your income is likely lower than in past years, which — since you need to pay income tax on the amount you convert — would reduce how much income tax you pay when making this change. You have to meet specific income requirements to contribute to a Roth IRA, and you’ll also face a maximum contribution limit that varies based on your age. Keep in mind that not everyone can contribute to a Roth IRA — at least not the full amount. In 2021, married filings with a modified adjustable gross income (MAGI) below $198,000 can contribute the full amount to a Roth IRA.
via Now Might Be the Perfect Time to Do a Roth IRA Conversion
