ROTH Conversions

Are you planning on converting a Traditional IRA into a ROTH IRA?  If so you may want to consider not only the Federal tax consequences but also any state tax consequences.  Now if you think you will be in a higher tax bracket when you retire it makes good sense to convert the IRA now provided you can afford to pay the taxes associated with the conversion.  Where you live will also have an impact on if a conversion makes sense for you.  A ROTH makes sense for numerous reasons but the two biggest affect our choices are what tax bracket we will be in when we retire and second all of us with ROTH accounts hope that Congress does not change the rules on us at some point in the future.

Now if you do think you will be in a high or higher tax bracket after retirement ROTH accounts do make sense.  Pay the taxes now and enjoy a tax free retirement.  But you also need to take into consideration state taxes on income in your retirement.  There are a few states but not many that do not have an income tax and those that do generally have fairly high rates when you consider a conversion.  So when you are planning a conversion now take into account state income taxes as you will owe those in addition to the Federal income tax.  So do think of the entire tax consequences when you are considering a Traditional IRA to a ROTH IRA conversion.

Many people who retire move from states with high income tax to states with lower or no income tax.  So if you are paying taxes in a state with high income tax the benefits might not be as good when you move as you have now paid income taxes in the higher state and will not have any taxes on a ROTH withdrawal in your retirement years in the low or no income tax state.  The same is true for your conversion IRA’s and that is it may not make sense to convert an IRA to a ROTH when you live in a state with high income tax and plan on moving.  The key to remember here is what you think your tax situation will be in your retirement years and will the state you live in have a high, low or no income tax.

Now it is always a good idea to start with a ROTH IRA when you are young as you have no idea where you will be when you retire or what states will do with regards to income tax.  But letting your money grow for 30 to 35 years tax free in an IRA is always a good idea.  That and when you are just starting your career in theory your tax bracket is lower as your earnings are not as high yet.  Unless you are converting large sums a ROTH IRA is always a good way to go for retirement.

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