A New Risk To Converting To A Roth IRA
Converting to a Roth IRA is appealing if you think Federal taxes will go up, but now carries a new risk. Roth conversion is still a good idea but it's important to understand how the rules changed and could come into play.
Phantom Income. The new risk to converting stems from a change in tax rules and it's probably not going to make you decide against converting a traditional IRA to a Roth, but it is a material new factor in the equation, a risk of being taxed on "phantom income."
Roth v. Traditional IRA. Roth conversions are likely to grow more popular because a Roth is taxed differently from a traditional IRA. You contribute pre-tax dollars to a traditional IRA, which lowers your taxable income each year you contribute. In retirement, you pay taxes on withdrawals to live on. In contrast, a Roth IRA allows you to contribute after-tax dollars and grows tax-free. Withdrawals in retirement are also tax-free. That's why converting to a Roth now looks smart if you think tax rates will be higher in your retirement years.
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