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Four reasons you may want to convert to a Roth IRA

Should a Roth IRA conversion be part of your investment strategy?

Recent market volatility may have prompted you to review your investment plans. As you take a look at your retirement goals, you may want to consider converting to a Roth IRA from a Traditional IRA.

Roth IRAs possess characteristics that make them generally attractive planning tools; for example, they are not subject to required minimum distribution (RMD) rules during the life of the original account owner, which means that you can use them as an estate planning tool for passing money to your heirs. A combination of tax law changes and market conditions might now make Roth IRAs even more attractive, especially to investors who are in a position to pay taxes due upon conversion with non-retirement plan assets.

Here are four reasons why now might be a good time to convert:

  1. If recent market volatility has depressed the value of your portfolio, you may owe less in taxes. When you convert to a Roth IRA, you will owe taxes on any tax-deductible contributions you made to the Traditional IRA as well as any tax-deferred earnings that may have built up in the account over the years. A lower account value would typically result in a lower tax bill.
  2. If you expect your portfolio’s value to recover in the future, converting now could shield future earnings from taxation. After conversion, any assets in the Roth IRA would potentially grow on a tax-advantaged basis and qualified distributions are tax-free.*
  3. If you expect that future tax rates will be higher when you begin to take distributions, converting and paying a lower tax now might make economic sense. Moreover, qualified distributions would be tax free.*
  4. Your non-spouse designated beneficiaries can let the Inherited Roth IRA continue to potentially grow, taking no distributions until year 10 when they fully distribute the account with no tax consequences. After the passage of the SECURE Act in late 2019, non-spouse designated beneficiaries generally must distribute an Inherited IRA by the end of the 10th calendar year beginning the year after the IRA owner dies.

If your employer’s qualified retirement plan offers a designated Roth account option, you also may want to consider making contributions to this account. Designated Roth account assets can be rolled over only to a Roth IRA or another employer’s designated Roth account, if that plan accepts the rollover.

It is important to remember that the tax law no longer allows you to re-characterize or undo a Roth IRA conversion. Contact your financial advisor to discuss if a Roth IRA conversion is right for you.

*Qualified Roth IRA distributions are not included in gross income. Roth IRA distributions are generally considered “qualified” provided a Roth IRA has been open for more than five years and the owner has reached age 59 1/2 or meets other requirements. Withdrawals may be subject to an IRS 10% additional tax for early or pre-59 1/2 distributions.

Roth IRA conversions are not suitable for all individuals. Wells Fargo Advisors is not a tax or legal advisor. Please consult your financial, tax, and legal advisors before taking any action that may have tax or legal consequences and to determine if a Roth conversion is suitable for your specific situation.

Please keep in mind that rolling over your qualified employer sponsored retirement plan (QRP) assets to an IRA is just one option. Each option has advantages and disadvantages, and the one that is best depends on your individual circumstances. You should consider features such as investment options, fees and expenses and services offered. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with a QRP. We recommend you consult with your plan administrator before making any decisions regarding your retirement assets.