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Conversion typically refers to the process of moving funds from a traditional IRA to a Roth IRA. This is known as a Roth IRA conversion.

Here’s a bit more detail:

  • Traditional IRA: This type of IRA offers tax-deferred growth, meaning you don’t pay taxes on your contributions or investment gains until you start taking distributions in retirement. However, these distributions are then taxed as ordinary income. Also, depending on your income and whether you have a workplace retirement plan, your contributions may be tax-deductible.
  • Roth IRA: This type of IRA offers tax-free growth, meaning you pay taxes on your contributions up front, but you can withdraw both contributions and investment earnings tax-free in retirement, as long as you meet certain criteria.
  • Roth IRA Conversion: This is the process of moving funds from a traditional IRA into a Roth IRA. In doing so, you would pay income tax on the converted amount in the year of the conversion. The primary reason for doing this is the belief that your tax rate now is lower than it will be when you retire and start taking distributions.

There are many factors to consider when thinking about a Roth IRA conversion, such as current and future tax rates, the time until retirement, and your ability to pay the tax on the conversion with funds outside of the IRA. It’s generally recommended to consult with a financial advisor before making this decision.