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As you survey the financial landscape in 2022, you may be worried about preserving retirement assets, plus the prospect of higher income tax rates in the future.

Consider converting a traditional IRA to a Roth.  You’ll pay an up-front tax cost in exchange for the security of tax-free payouts in retirement.  With a traditional IRA, contributions may be wholly or partially deductible, but deductions are generally not available to moderate- to high-income individuals. When distributions are received, you’re taxed at ordinary income rates reaching up to 37% on the taxable portion. Also, under the latest rules for required minimum distributions, you must begin taking money out of the Roth the year after the year in which you turn age 72.  Conversely, contributions to a Roth IRA are never tax-deductible, but qualified distributions from a Roth at least five years old are completely exempt from tax. For this purpose, “qualified distributions” are payments made after age 59½, on account of death or disability, or used for first-time homebuyer expenses.  Furthermore, any Roth IRA distributions that don’t meet these
requirements are taxed under favorable “ordering rules,” So it’s likely you’ll owe little tax—if any—on future withdrawals.  What’s more, lifetime RMDs aren’t mandatory, like they are with traditional IRAs. Thus, the main benefits
of Roth IRAs are on the back end.  Before you get there, however, you must pay tax at ordinary income rates in the year of a conversion. The controlling date for this purpose is the conversion date.  If you convert to a Roth on August 1, 2022 and the value of the IRA on that date is $1 million, the tax is based on a conversion value of $1 million.  One reason you might decide to convert to a Roth in 2022 is that your account is much lower than it was before due to market conditions, so you will have to pay less tax than you would have previously.  Another possible reason for a conversion is to ensure tax-free payments in the future when tax rates are higher. Many of the pro-taxpayer changes in the Tax Cuts and Jobs Act, including rate reductions, expire after 2025.  Of course, you must figure in other factors, including your ability to pay the tax out of your own pocket, your time horizon for retirement, your current tax bracket and expected bracket in retirement, etc. Plus, be aware that you can no longer undo a conversion through a “recharacterization.”  If you have to use the funds in the IRA to pay the current tax, you’re diluting the benefit of the conversion because you have less money for retirement.[/vc_column_text][us_image image=”3781″][/vc_column][/vc_row]