The Top 10 Savings Mistakes People Make With Roth Conversions


Do you make these savings mistakes with Roth conversions?

You’ve probably thought about putting money into a Roth IRA or 401(k) or converting your funds into one. The goal of every retirement savings account is to reduce your taxable income. And Roths might be a very effective strategy to lower your tax liability.

If you don’t know what a Roth is, here’s the short answer: a retirement savings account. You should know that you pay taxes on the funds you deposit into a Roth account. The benefits of these investments include tax-free growth of your money, tax-free withdrawals, and no mandatory minimum distributions at any age. However, these come with a price.

Your savings contributions to a regular 401(k) or IRA are tax-deferred. You don’t have to pay taxes for the money you save. While Roths can be a great tool for retirees or future retirees, people make many savings mistakes with Roth conversions. We’ll talk about everything today, so make sure to read along with us until the end of this article. Let’s begin!

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1. You don’t want to open a Roth

There are some income limits when contributing to a Roth account. For instance, financial experts say that in 2024, you need to have a modified adjusted gross income (MAGI) below a particular threshold to save into a Roth. You can go on the IRS website to see the latest income limit updates.

A popular savings mistake people make is getting discouraged from taking advantage of Roth accounts. Even though there’s a limit and you can’t directly save into a Roth, you can put money toward your traditional IRA account and then convert the money into a Roth. This technique is commonly known as “backdoor” Roth savings, and it can be pretty helpful.

2. You already have a 401(k)

There are a couple of different types of retirement savings accounts: retirement accounts, such as 403bs, SEPs, 401ks, and Roth IRAs, and individual retirement accounts (IRAs).

You can still contribute to an IRA or a Roth IRA if you’re saving through your employer’s retirement plan, and you really should consider it, especially if you have the funds. If you want to, you can make contributions to your employer-sponsored retirement plan in addition to your Roth IRA.

According to experts, the 2024 Roth and regular IRA contribution cap is $7,000, plus an extra $1,000 in catch-up contributions if the contributor is 50 years of age or older. The 2024 401(k) annual contribution cap is $23,000, plus an additional $7,500 if you are 50 or older.

3. Withdrawing your converted Roth funds too early

One of the main things people love about Roth accounts is that the money you put in there grows tax-free. This means that you should wait for your account to grow after you make a Roth conversion.

Experts say that converted Roth funds should stay in your Roth IRA for at least 5 years before you make any withdrawals. One of the first savings mistakes people make is withdrawing money before the 5 years pass, which results in a 10% early withdrawal penalty.

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4. Not having enough cash flow

Some people don’t have enough cash flow available to pay taxes on their Roth conversions, and that can lead to a problem. Unlike contribution caps, there are no restrictions on the amount you can convert to a Roth. However, you need to have the financial means to cover the conversion’s taxes.

The amount of tax you can afford in any particular year might have an impact on your conversion. The IRS will treat the converted funds as income and impose income taxes as needed.

5. Contributing too much

Is there something like contributing too much to a Roth account? Yes, there is. As we’ve already said at the beginning of this article, there’s a limit on how much you can contribute to your account.

If you make any investments that exceed the limits, the IRS will know, and they’ll charge you a 6% penalty tax. And that’s not all: you’ll pay this penalty every year until you don’t take action and correct the error.

6. You use a Roth when you’re in your highest tax bracket

If you’re in your highest-earning era, you will probably benefit more from traditional contributions than from a Roth account. Moreover, if you think your taxes will be lower in the future, a Roth isn’t right for you at the moment.

You can check out different platforms, such as New Retirement Planner, to get insight into how big your tax bracket will be in the future. This will help you identify potential Roth conversion opportunities.

7. You overlook  your partner’s savings opportunities

We continue with these savings mistakes, and this time is all about couples. For better or worse, even when both partners work for a living, one of them is frequently more concerned with the household’s finances than the other.

This might mean that the financially savvy partner takes care of his resources and always makes the right move, but doesn’t take advantage of their spouse’s opportunities. If your significant other is still working, make sure they make the most of their financial opportunities, and that includes a Roth account.

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8. You overlook the opportunity to save for your partner

Generally speaking, you need to be employed to invest in tax-advantaged savings vehicles. However, if you’re married and you file a joint return, you can use a spousal IRA to max out a Roth IRA for each spouse. You can make contributions on their behalf, and the yearly individual contribution restrictions are the same.

Therefore, you can still contribute up to $16,000 for your family if you are married, both over 50, file a joint return, and only one partner earns money. ($7,000 plus $1,000 for each of you in catch-up contributions).

9. You don’t factor in Roth savings and conversions as part of a comprehensive financial plan

While everyone wants money set aside, they still make several savings mistakes. Speaking of that, if you want to be savvy and financially intelligent, you should never make a money decision without knowing the advantages and disadvantages of your whole financial situation, both now and in the future.

Several considerations can impact the actual advantages (or disadvantages) of doing a Roth conversion. For instance, you and your family can be affected by whether your investments are in a Roth account. You should keep an extensive written financial plan up-to-date to simulate the effects of your choices.

As we’ve previously discussed, a great online tool is the NewRetirement Planner. This intelligent system helps you have better financial outcomes, make smarter decisions, and feel more at ease about your finances. It has a user-friendly system, so you can have a wonderful experience. Check it out, because it might make a huge difference!

10. You make Roth conversions without following the rules

If you move your funds from a standard retirement savings vehicle into a Roth account, you should follow their rules. You can choose a:

  • Rollover: this happens when you withdraw funds from your traditional IRA and deposit that money into a Roth account within 60 days.
  • Trustee-to-trustee transfer: in this case, you instruct the organization that manages your traditional IRA to move the money to another organization that manages your Roth account.
  • Same-trustee transfer: in this scenario, you tell the same institution to handle the transfer for both your traditional and Roth accounts.

The simple act of taking money out of your retirement plan and depositing it into a Roth IRA could result in an early distribution tax of 10%, so it’s always a smart idea to be informed. Speaking of knowledge, if you’re looking for a book that will teach you everything you need to know about Roth conversations and savings mistakes you should avoid, check this out!

Have you ever made any of these savings mistakes? Let us know in the comments below! If you find this article helpful and you’d like to check out something else from Easy Seniors Club, here’s a good post for you: Health Insurance Denial: 7 Possible Causes and What You Can Do

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