Roth conversions and your retirement

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Q. I have a traditional IRA worth $55,000 and a 401(k) worth $780,000. These are my only savings, and I have no Roth accounts. I plan to retire in three years. When I do, how can I decide if it makes sense to convert any of the money to a Roth?
– Thinking about it

A. Converting traditional IRAs or 401(k)s to Roths would give you tax-free accounts to access in retirement, but you’d have to pay the taxes on the conversion today — or when you make the conversion.

As you prepare for retirement, it’s not necessarily the right time to make such a move.

“If you are getting ready to retire you are probably at one of the highest income points of your life, and you may not retire at that income level,” said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton. “The main benefit of the Roth is that you pay taxes in a lower tax bracket than you would have pulled out in a higher tax bracket.”

Taking it further, you need to understand a few things about your future outlook, Lynch said.

First, what will your income level look like in retirement with Social Security and income from your 401(k)s and IRAs?

If it’s higher than your current income, converting could make sense. If your income will be lower, a conversion probably isn’t smart.

It will also depend on where you plan to live in retirement.

“Some states, like Florida, do not have an income tax,” Lynch said. “Converting in New Jersey means you are paying a state income tax that you would not have to pay if you converted or just took your distribution in Florida.”

You also need to look at your tax bracket.

For example, Lynch said, the 15 percent tax bracket goes up to around $75,000 for married couples. The next bracket is 25 percent — which is 66 percent higher.

He said you need to understand the tax brackets and make sure that the conversion does not bump you into a much higher tax bracket.

“I love tax-free income but it only makes sense when it makes sense,” he said. “Before any conversion I would run this by your CPA to make sure you are not missing anything, as there are a lot of details.”

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This post was first published in July 2017.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.