Ask an Advisor: Should I Pay Taxes on My IRA Now or Wait Until Retirement?

Core Insights - The article discusses the differences between traditional IRAs and Roth IRAs, emphasizing the tax implications and withdrawal rules associated with each type of account [6][7]. Tax Implications - Traditional IRA withdrawals are subject to regular income taxes, which can increase taxable income and potentially affect tax brackets and Social Security benefits [2]. - Roth IRA contributions are not tax-deductible, but withdrawals are tax-free if rules are followed, allowing for tax-free earnings [5]. Withdrawal Rules - Required minimum distributions (RMDs) must begin at age 73 for traditional IRAs, while Roth IRAs do not have mandatory distributions [3]. - Traditional IRA withdrawals before retirement age incur a 10% penalty in addition to income tax, whereas Roth IRA contributions can be withdrawn without penalty after the five-year conversion anniversary [4]. Conversion Considerations - Converting a traditional IRA to a Roth IRA can be beneficial, especially during lower-income years to minimize tax impact [10]. - It is advisable to convert in blocks rather than all at once to spread out the tax burden over several years [11]. Timing and Strategy - The further away from retirement, the more advantageous a Roth conversion can be, as tax-free earnings have more time to accumulate [12]. - The five-year rule applies to Roth conversions, meaning penalty-free withdrawals cannot occur until five years after the conversion [15][16]. Tax Payment Strategy - It is crucial not to use funds from the conversion to pay taxes, as this can lead to penalties and reduced growth in the Roth IRA [18][21]. - For example, converting $20,000 while withholding $2,000 for taxes results in a smaller Roth IRA balance and potential penalties for early withdrawal [19].