When Not to Convert to a Roth IRA
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What is the main topic discussed in this episode?
With your Money Briefing, I'm Charlie Turner in New York. Converting to a Roth IRA from a traditional IRA can mean tax advantages for you, but there are reasons that you should steer clear of converting to a Roth. We'll have details, but first, here are some money and market stories you need to know. Tesla investors take note. In the wake of CEO Elon Musk's tweet about wanting to take the carmaker private, the Securities and Exchange Commission is investigating the company on multiple fronts, including issues related to disclosure about production of the Model 3 sedan. Wall Street Journal heard on the street columnist Charlie Grant says any SEC fine that may result from possible violations would have minimal impact on Tesla's finances.
Charlie writes that the most important impact is Tesla may struggle to raise cash it badly needs while the investigation is going on. Few investors will buy new shares in a company under investigation. Those who would will likely demand tough terms which would come at the expense of current investors. You may have heard that President Trump wants the SEC to study the possibility of requiring public companies to report earnings every six months instead of each quarter. Proponents say it would make companies less likely to focus on short-term profits. Heard on the streets, Justin Layhart writes that executives might want to say as little as possible, but investors want to know as much as possible about the companies they own.
Longer lag times between financial reports would make investors view stocks as riskier since a lot more can happen in six months than in three months.
What is a Roth IRA and why consider converting from a traditional IRA?
Stocks would eventually reach the same place. It would just take longer and the short-term moves would be bigger. This ought to lead, all else equal, to stock prices a little lower and companies' cost of capital a little higher.
When does paying taxes now make a Roth conversion worth it?
Also, writes Justin, longer lag times could create a less level playing field among investors. U.S. consumer sentiment slid in August to its lowest level in nearly a year as consumers registered concern about rising prices. That's according to the University of Michigan's Preliminary August Index. The survey found that buying conditions for large household durable goods, vehicles, and homes were all viewed less favorably this month.
If you have a traditional individual retirement account, you may have already converted it to a Roth IRA. But those who are still contemplating the switch to a Roth should think about whether or not this is really a good strategy for them. In our studio now is Wall Street Journal special writer Laura Saunders, who writes the tax report. Laura, since 2010, Congress has allowed owners of traditional IRAs to make full or partial conversions to Roth IRAs. Quickly tell us basically what a Roth IRA is and what the advantages are to converting to one of them.
Well, a Roth IRA has wonderful advantages if it's not too expensive to get there. Roth IRAs, the money goes in after tax, it grows tax-free, and then it comes out tax-free.
How can state tax differences affect whether you should convert to a Roth?
So if your $100 grows to a million dollars, there's no tax on it. Also, there are no required payouts like there are with traditional IRAs. So it's a great thing to have. The only question is, Is it appropriate to do the conversion because you have to pay full taxes on the conversion? People really flinch when they have to write that check. But sometimes it's a good idea not to write the check. So we dredged up some of those circumstances.
Okay.
Why shouldn't you convert a traditional IRA if you must use IRA funds to pay the tax bill?
Conversion is not always a good idea, according to experts that you've talked to, right? First of all, you pay tax on the transfer.
That's right. You have to write a check.
How can market losses after conversion make a Roth conversion disadvantageous?
And it can make your income go up so that it could affect other benefits as well. You have an income spike. It could lower your child's financial aid for college or something like that. So there are all these circumstances that you want to think about about when it's a good idea or a good time to make a Roth conversion.
Okay, some other reasons. Maybe this one's the most important one.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:06–1:37
2
What is a Roth IRA and why consider converting from a traditional IRA?
1:37–1:49
3
When does paying taxes now make a Roth conversion worth it?
1:49–3:06
4
How can state tax differences affect whether you should convert to a Roth?
3:06–3:31
5
Why shouldn't you convert a traditional IRA if you must use IRA funds to pay the tax bill?
3:31–3:39
6
How can market losses after conversion make a Roth conversion disadvantageous?
3:39–4:09
7
What 'stealth taxes' and benefit impacts can a Roth conversion trigger?
4:09–5:04
8
When might medical expenses or potential future tax law changes make conversion a bad idea?
5:04–7:41
Speakers
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