When Is the Best Time to Do an IRA Roth Conversion?

July 20, 2021

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deferred — that is, investors receive a tax deduction on the money they contribute, then owe taxes when the money is withdrawn.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.

Why a Roth conversion may make sense in 2020

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.)

What Are My Roth IRA Limits?

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

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.

Roth IRA Income Limits

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.

Does It Make Sense?

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.

Fresno Retirement Advisor Takeaways

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

via The 8 Best Roth IRA Accounts of 2021

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