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An earlier version of this post misstated how much income would be subject to higher taxes. The clock was ticking down to tax day when I realized that I made a huge mistake. I had picked a retirement investment a year earlier thinking I was being proactive about the future, but it was about to bite me back on April 15, and take a serious toll on my bank account. I was always told that saving now gave me the best chance of having a substantial income once I no longer work.
So when a job change last year gave me the chance to decide what to do with my old work-sponsored k , I decided to convert the amount I had previously accumulated to a Roth IRA. Rowe Price customer data. When tax season rolled around, I knew a bill would be in store on the Roth.
When I put the Roth information into my online tax tool, my tax refund turned into a tax bill. And a big one at that. The problem was quickly diagnosed in a call to the parents. All of a sudden, a higher tax rate was being assessed on part of my income. The tax-bracket issue is one of the key ways in which Roth IRAs trip up retirement savers, according to a Fidelity Investments explainer.
With tax day approaching, I began to fret. She immediately knew what to do. In effect, you are taking some or all of the money in the Roth and postponing the taxes on it until a later date. I was pretty relieved by the thought that the Roth conversion had a control-z key on it. Problem solved, I thought. Thomas told me that I had made a smarter decision than I had given myself credit for.
Because was such a great year in the stock market, my money had probably grown a substantial amount, and that income is free from future taxes. For young investors who can afford to pay the taxes out of pocket, it likely makes sense to skip the recharacterization, according to Ed Slott, an accountant and founder of IRAHelp.
But the broader lesson for me was clear: Millennials live in a world that now requires financial planning acumen. The time to become an expert is now.
Only two things in this world can be said to be certain, according to Benjamin Franklin. Tax Watch is about one of them. The blog examines the complicated tax issues and legislative changes to help you tackle tough personal finance challenges — and avoid costly tax missteps.
The lead writer is MarketWatch reporter Jonnelle Marte. Tax Watch Your crib sheet to the ever-changing U. By Ben Eisen Shutterstock.