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Money Smart: How to maximize the value of your retirement account

Here's how a ROTH conversion could help you save money in retirement.

SAN ANTONIO — There are different retirement plans available. A 401(k) is an account where an employer can match your contributions. There are also retirement accounts that you can fund outside of a workplace like a traditional individual retirement account (IRA). You do not have to pay taxes until you withdraw money from your account. The benefit of an IRA is that you may end up paying less taxes, since your taxable income could be less in retirement.

A ROTH IRA is a retirement account that you can set up without assistance from an employer as well. You will pay taxes upfront but can enjoy tax-free withdrawals in the future. This account is beneficial if you are currently, in a low-income tax bracket and anticipate you’ll be in a higher income tax bracket in the future. Another benefit is that unlike traditional IRAs, you do not have what’s called a required minimum distribution (RMD), where you must withdraw a certain amount of money from the account at age 70 1/2.

Karl Eggerss, senior wealth advisor and partner of Covenant, explains the tax benefit of converting your traditional IRA to a Roth IRA.

“Not everybody is eligible for a ROTH IRA or to make a contribution to one. However, everyone is eligible to do a ROTH conversion, meaning you take your existing IRA, you convert it to a ROTH or some portion of it and you pay taxes on it at that time,” explained Eggerss. 

“If you don’t need your IRA money and you’re in a low tax year, you may consider converting a portion of your IRA – paying a very little amount of tax on that and converting to a ROTH. Therefore, letting it grow tax free for the next several years. In fact, a lot of people took advantage of this in March and April when the stock market was down. They were able to take some of their stocks, mutual funds, and convert them to a ROTH.”

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