Traditional IRA to Roth?

[MrsDarcy]

Hi all,

Admittedly, I know nothing about IRAs, but I transferred my 401k to a traditional IRA when I left my job to SAH 19 months ago. I have not converted to a Roth. Can you please surface-level explain the difference between the two, and what will happen (money-wise) when I convert? I'm in NC if you need that info for tax rates. I have about 22k in the IRA.

Thanks!

[y4m]

Since that IRA was rolled over from a 401K, you've presumably never paid taxes on it. So when you roll it over into a Roth, you'd essentially be adding $22K more to your income for that year, at whatever your highest marginal rate is. So you pay that on that year's taxes, but then the Roth grows tax-free forever. You can elect to have the taxes withheld from the Roth when you convert it, but you should really try not to, because then you've decreased your retirement savings.

If you decide to leave it as an IRA, you'll have to pay taxes on the money you take out in retirement, including the growth.

[MrsDarcy]

Ahh, makes sense. Thanks!

So we could be looking at paying about 5k in taxes to convert? Ouch.

Aren't there tax advantages to having a Roth? Or just that all future contributions are tax free (because you're using post-tax dollars)?

[y4m]

The tax advantage is that the Roth will grow and grow and nothing in that account (the initial investment or interest) will ever be taxable again (at least under current law). The IRA is all going to be taxable during retirement.

There's not really any tax difference today for you. They do have some other differences in terms of how you can withdraw/borrow money from them before retirement, but this is MM and you're not going to do that anyway

[MrsDarcy]

Of course not!

Thanks so much for your help! I really appreciate it.

[MrsDarcy]

Also good to know. Thanks!