Ask Clark: Should I Convert a Traditional IRA to a Roth IRA?

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Roth IRA conversion
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We all know there’s not a lot of good news economically coming out of the coronavirus pandemic right now.

But money expert Clark Howard sees at least one bright spot when it comes to converting a traditional IRA to a Roth IRA — also called doing a Roth conversion.

What Exactly Is a Roth Conversion?

Before we get to the exact meaning of this term, let’s set a little background.

A traditional IRA is a tax-deferred account where you contribute pre-tax dollars that grow and are then taxed at your current tax rate when you draw on them down the road.

By contrast, a Roth IRA is a tax-advantaged account. You contribute to it with after-tax dollars that grow and aren’t taxed again when you take them out.

So a Roth conversion is the term used when you take all or part of an existing traditional IRA (pre-tax money) and convert it into a Roth IRA (post-tax money).

One very important thing to note: You’ll have to pay tax on the money you convert. There’s no free lunch here.

But there’s a compelling reason why you might want to do this right now…

Why Would You Consider Doing a Roth Conversion?

There are a few reasons why you might want to do a Roth conversion at this time.

First, you might do it so that you could spend your money tax-free in retirement. Beyond that, you might also do it so you aren’t forced to take required minimum distributions.

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Under new rules as part of the SECURE Act, traditional IRAs now require you to take distributions from your account starting at age 72. Roth IRAs, however, still don’t require any distributions.

That means if you don’t need the money in your Roth, you can just leave it untouched to continue growing for your beneficiaries.

However, at this nearly unprecedented moment in time, Clark says there are a couple other compelling reasons why you may want to explore doing a Roth conversion right now.

One big one has to do with the precipitous decline in the value of the stock market we’ve been witnessing.

“Although it is possible that stocks could continue to decline, there’s already been a huge decline — meaning that the cost for you of converting shares from a traditional IRA to a Roth IRA has gone way down, roughly by about a third,” Clark says.

“It could get lower from here, but this is such a positive development in a negative situation for you.”

So, if you’re thinking about taking advantage of this situation and converting from traditional to Roth, your timing would be excellent, Clark notes.

Another plus is that many people will have lower incomes this year because of economic fallout from the coronavirus. So if you still do have spare money available to pay the tax on a conversion, this is the time to do it because you’ll wind up with a lower overall tax bill.

“It would be a very, very solid and smart move for your future,” Clark says.

How Do You Do a Roth conversion?

The process of converting a traditional IRA to a Roth IRA is pretty basic.

If you don’t already have a Roth IRA, you’ll have to open an account before you can begin. You can do that at a low-cost investing house like VanguardFidelity or Charles Schwab.

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Once your Roth IRA account is open, you simply transfer money from your existing traditional IRA to your Roth IRA. If you’re doing a in-house transfer, just get in touch with them and they’ll be able to walk you through the process.

If you’re moving money from an outside firm, contact them and tell them you’re looking to convert your traditional IRA into a Roth IRA at a new investment house.

Remember, you will have to pay tax as you move from pre-tax money (traditional IRA) to post-tax money (Roth IRA). But for the reasons we’ve outlined above, now may be the perfect time to do this. Consult with a tax advisor if you have any questions.

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