(WXYZ) - We're heading towards the so-called fiscal cliff and that could mean heftier income taxes on everything including your retirement.
There's something you can do now that could have you paying fewer taxes later- consider converting your Traditional IRA to Roth IRA by the end of the year.
First the basics, in a Traditional IRA you contribute pre-tax money and you'll pay income taxes when you make withdrawls. In a Roth IRA you contribute post-tax money, but you won't have to pay income taxes on that money again.
Financial consultant Rick Bloom says almost anyone with a Traditional IRA should think about converting, especially with today's low income tax rates and with the Bush tax cuts set to expire at the end of this year.
"Next year most likely we're gonna have higher taxes. So this is a great year to do a Roth conversion- whether you're a senior or a young person, if you have a traditional IRA you should look at doing a Roth conversion have money grow tax differed, now have it grow tax free, " says Bloom.
Bloom says you're a good candidate if:
- You have the money to pay the taxes without touching the money your converting
- It won't put you into a higher tax bracket by converting
-You can leave the money there for at least five to seven years.
Roth IRAs also have an advantage of not being subject to a rule called the 70 and a half rule.
"Someone turns 70 and a half they have to take money out of their Traditional IRA. You don't have to do that in your Roth IRA. You let it grow tax free as long as you choose," says Bloom.
Roth IRAs do have some income limitations.
Single filers can have an income up to to $110,000 to qualify for a full contribution or $110-$125,000 for a partial contribution.
Joint filers can have an income up to $173,000 for a full contribution and $173-183,000 for a partial contribution.
Age matters for how much you can contribute to a Roth IRA. If you're under 49, your maximum contribution is $5000 dollars. And if you're over 50 your maximum contribution is $6000 dollars.