Should You Convert Your IRA Retirement Savings to a Roth IRA?
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Here's your money briefing for Monday, June 27th. I'm J.R. Whelan for The Wall Street Journal. This year's stock market sell-offs have not been kind to many investor portfolios. If you've got a traditional IRA, you might be worrying about the risk your retirement savings are facing.
What is the episode's focus on converting traditional IRA funds to a Roth IRA?
Converting your savings to a Roth IRA might be an option.
When the market is lower, you are moving assets that have potential for appreciation, assuming the market goes up, into a tax-free account.
So how does that work? And is it really outside the reach of Uncle Sam? WSJ tax reporter Laura Saunders has been making a list of the pros and cons of converting traditional IRA funds into a Roth IRA. And we'll talk with her about that after the break.
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Watching your retirement savings take hit after hit from the stock market this year might make your stomach turn. So how can you protect the money you'll need later in life? One option that's often overlooked is moving funds from your traditional IRA into a Roth IRA. It can give your savings a boost, but it's tricky. Let's call on WSJ tax reporter Laura Saunders to sort out some questions for us. Laura, thanks for being with us.
Thanks for having me.
So Laura, first of all, help us understand this. What's the difference between a regular or traditional IRA and a Roth IRA?
Well, that's a good question to start with. A traditional IRA and a Roth IRA have one important thing in common, which is that the assets inside of them grow tax-free year to year. There's no taxes paid annually. So the buildup is tax-free. However, with a traditional IRA, you get a deduction on the money when it goes into the account. And then when you take money out of the account in retirement, it's taxable at ordinary income rates like wages. What happens with a Roth IRA is that the money goes in after tax, but the growth is tax-free and the withdrawals can be tax-free as well. So if you make some great investments and it builds up over a long period of time, that's a nice bunch of tax-free withdrawals you're looking at.
All right. And so why would some financial experts recommend that people explore converting their traditional IRA to a Roth IRA in this market environment?
I think we need to be clear that it's not always a great idea to do a Roth conversion. But when the market is lower, you are moving assets that have potential for appreciation, assuming the market goes up, into a tax-free account. So it's not that you should do a Roth IRA conversion now, but you shouldn't forget about one. It's a good time to check and see if it makes sense.
All right. So how does this work? How does the money get from the IRA to a Roth? And how do you get a Roth IRA?
Well, to get a Roth IRA, you go to your provider, probably the one that has your traditional IRA, although it could be someplace else. A lot of times those are big outfits like Fidelity or Schwab or Vanguard or BlackRock or something like that. Then you say to them, I would like a Roth IRA, please.
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