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Roth Conversions for Solopreneurs, Ep #94

Do you want to win the tax game? If so, you may want to consider doing Roth conversions. On this episode of Solopreneur Money, you’ll learn what a Roth conversion is, why you might want to do one, when you might want to do one, and how to do a Roth conversion. If you have been wondering what all the hype about Roth conversions is, then make sure to press play to find out.

You will want to hear this episode if you are interested in…

  • What a Roth conversion is [1:02]
  • How to win the tax game [6:30]
  • When to do a Roth conversion [11:28]
  • How to do a Roth conversion [15:18]

What is a Roth conversion?

Before I can explain what a Roth conversion is, you’ll need to know what a Roth IRA is. A Roth IRA is an after-tax retirement savings account. Money in these types of accounts has already been taxed so it grows tax-free. Not everyone can contribute to a Roth IRA, but everyone can convert assets from a traditional IRA-type account to a Roth.

When you convert money from a SEP IRA, traditional IRA, or simple IRA to a Roth IRA you change the tax structure of your assets. Assets in traditional IRAs are tax-deferred, meaning you have to pay taxes on them when you access them. If you choose to convert these assets into a Roth IRA account, you will pay taxes on the earnings at the time of conversion. Then they will grow tax-free in the Roth IRA account.

How to win the tax game

One reason you would want to convert money from your traditional IRA to a Roth IRA is to change the tax structure of these assets to relieve your tax burden in retirement. Essentially, you are paying the taxes now at a tax rate you know. Once you convert these monies into a Roth they can continue to grow tax-free. When the time comes to cash in on your assets you will be able to play both sides of the tax game.

You have to pay taxes on your 401K at the time of withdrawal, but when you withdraw from your Roth it will be tax-free since you invested after-tax money. When you have assets invested in multiple types of retirement accounts you will have a blend of taxed and after-tax money to put in your retirement buckets. This will be helpful since no one knows what the tax code will look like in the future. This is the way to win the long-term tax game.

Another reason that you may want to convert your assets into a Roth is so that your heirs can enjoy a tax-free transfer of wealth. When leaving them pre-tax assets they will have to withdraw the assets within ten years and pay taxes on those assets. With a Roth the taxes are already paid and by naming your kids as beneficiaries, they have a direct transfer of after-tax wealth.

When to convert your assets to a Roth IRA

Not every time is a good time to convert your assets to a Roth IRA. Some times are more advantageous than others. If you are having a lower income year then doing a Roth conversion would be a great way to take advantage of your lower tax rate. When the market is down you can take advantage of the lower returns to make your conversions. Another great way to take advantage of your current tax rate is by filling up your tax bracket with conversions. Learn how to do this by pressing play.

Have you been enjoying the Solopreneur Money podcast? If so, please reach out to your solopreneur community and share it with those that would find tips like these helpful!

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