Well first, what is a Roth Conversion?
A Roth conversion is when you move money from a traditional IRA or another tax-deferred retirement account into a Roth IRA. The trade off is simple, you pay income tax on the money you convert today. In return, that money (and any investment growth it earns in the Roth account) can generally be withdrawn tax-free in retirement.
A Roth conversion is a useful financial planning strategy, but may not be the right choice for everyone. Whether it makes sense depends on a variety of factors such as current and future income and what tax bracket you expect to be in now and in the future.
One major benefit is greater control over your taxes in retirement. Roth IRAs do not require minimum distributions during the original owner's lifetime. Converting part of a traditional IRA can reduce the amount that may be subject to required distributions later and give you more flexibility when deciding which accounts to draw from each year. This can be especially useful in the years after retirement, when income may be lower, but before Social Security and required minimum distributions begin. That window may provide an opportunity to convert some IRA money at a tax rate that fits for your overall financial plan.
A conversion may also be an important planning opportunity for your heirs. Many non-spouse beneficiaries are required to withdraw inherited IRA funds within 10 years. If your children inherit a traditional IRA, the withdrawals are generally taxable income to them. That can be a concern if they inherit the account during their peak earning years, when their tax rate may ne higher. This raises an important planning question: Who should pay the taxes? If you are retired and in a lower tax bracket than your children when you make the conversion, paying some of the tax now through Roth conversions may reduce the total taxes paid by your family over time.
Roth conversions do not have to be an all or nothing decision. In many cases, it may make more sense to convert smaller amounts over several years. The right amount depends on your income, tax bracket, future required distributions, Social Security, Medicare premiums, spending needs, charitable plans, and the tax situation of your heirs.
The goal is not simply to avoid taxes. It is to make thoughtful decisions about when taxes are paid, how much is paid, and who ultimately pays them. When appropriate, Roth conversions can be a valuable tool for creating more flexibility in retirement and a more tax-efficient inheritance for the next generation.
If you are curious if this strategy could be a good fit for you, please reach out.
Let's explore your options and determine what approach may be right for you!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.