You won’t have a bigger fan of a Roth IRA. I’ve been a fan of them every since my dad told me about them over ten years ago. Back then, the appeal was in not having to keep track of capital gains and losses for tax purposes. As a kid with little understanding of personal finances and a healthy appreciation for the law, that seemed paramount. Nowadays, it’s the tax free investing that appeals to me and every other fan of the Taxpayr Relief Act of 1997.
The Roth IRA conversion income limits were removed this year and mainstream media pounced all over the topic of Roth IRA conversions. Until this year, you could convert if you earned less than $100,000, but this was the year the floodgates were opened. It seems like a no brainer, but there are significant and immediate consequences to converting a large amount into a Roth IRA. The allure of tax free investing and accrual is very strong, but there are many considerations many experts are overlooking.
At the core of these consequences is your income. Roth IRA conversions have a funny way of increasing your income significantly, especially if you’re making a large conversion from an IRA you’ve accumulated for years. Even five or ten years of diligent saving can result in a boost you are likely unprepared for. While it’s straightforward to calculate how much additional taxes you’ll owe, that’s simple math, it’s harder to see all the consequences of a much higher income.
All of these consequences are income based benefits you may lose as a result of higher income. Even if these don’t apply, hopefully they will get your brain on the right track so you can think of the benefits you might lose from having a higher income.
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