Should you consider a Roth conversion?

Allworth advisor Laurie Ingwersen, CFP^®, CRPC^®, CDFA^®, CBC^®, CEPA^®, explores the benefits and considerations of Roth conversions, helping readers determine whether converting to a Roth IRA aligns with their financial goals and tax strategies.

 

When it comes to retirement planning, one of the most common questions I hear is, “Should I consider a Roth conversion?” And as with so many financial decisions, the answer depends on your unique circumstances.

Roth conversions can be a powerful tool for managing taxes in retirement, maximizing wealth over the long term, and creating flexibility in your financial plan. But they’re not the right fit for everyone. Let’s explore what a Roth conversion is, who might benefit, and the key factors to consider before making a decision.

What is a Roth Conversion?

A Roth conversion involves moving money from a tax-deferred retirement account, like a traditional IRA or 401(k), into a Roth IRA. When you do this, you pay taxes on the amount converted now, but future growth and withdrawals in the Roth IRA are tax-free.

Think of it as a trade-off: you’re choosing to pay taxes today to avoid paying them in the future. Whether or not this is the right move depends on your current financial situation, tax bracket, and goals for the future.

Who Should Consider a Roth Conversion?

Roth conversions can be a game-changer in certain situations. Here are a few scenarios where they might make sense:

1. You Expect Your Tax Rate to Increase
   If you anticipate being in a higher tax bracket later—due to rising tax laws, Required Minimum Distributions (RMDs), or increased income—a Roth conversion can help you lock in today’s lower tax rates. Paying taxes now could mean significant savings down the road.
2. You Have Lower Income This Year
   If you’re in a year with reduced income—for example, after retiring but before starting RMDs—this might be an ideal time to convert. Lower income means a lower tax bracket, which could reduce the cost of the conversion.
3. You Don’t Need All of Your RMDs
   If you’re approaching age 73 and won’t need all of your RMDs to cover living expenses, converting some of your tax-deferred accounts to a Roth before RMDs kick in can reduce your future tax burden.
4. You Want to Leave a Tax-Free Legacy
   A Roth IRA can be a great tool for estate planning. Unlike traditional IRAs, Roth IRAs don’t require RMDs during your lifetime, which means the account can continue growing tax-free. Your heirs can also withdraw from a Roth IRA without owing income tax, making it an efficient way to pass on wealth.
5. You’re Concerned About Medicare Surcharges
   RMDs from traditional accounts can increase your taxable income, potentially pushing you into higher Medicare premium brackets. Converting to a Roth IRA can help reduce taxable income in retirement and keep your Medicare premiums in check.

Key Factors to Consider Before Converting

While a Roth conversion offers many benefits, it’s not a one-size-fits-all strategy. Here are a few important considerations:

1. The Tax Bill
   Converting means paying taxes on the amount you move into a Roth IRA. If the tax cost is too high—especially if it bumps you into a higher tax bracket—it may not be worth it. Carefully calculate how much you can convert without significantly increasing your tax liability.
2. Where to Pay the Taxes
   Ideally, you’d use money outside of your retirement accounts to cover the tax bill. Paying taxes from the account you’re converting could reduce the benefits of the conversion, especially if you’re under 59½ and subject to early withdrawal penalties.
3. Your Time Horizon
   Roth conversions typically make the most sense if you have several years (or decades) for the account to grow tax-free. If you need to access the funds soon, the benefits of the conversion might not outweigh the upfront tax cost.
4. Your Estate Planning Goals
   If your primary goal is to leave tax-efficient wealth to your heirs, a Roth conversion can be a great fit. However, if your heirs will be in a lower tax bracket than you are today, a conversion might not be as advantageous.
5. Current and Future Tax Policy
   Tax laws are always subject to change, and while no one has a crystal ball, it’s worth considering how future tax policy could affect your retirement strategy. A Roth conversion is a way to "tax-proof" a portion of your savings against potential increases.

Taking the Next Step

Deciding whether to do a Roth conversion is a personal decision that depends on your financial picture, goals, and tax situation. It’s a powerful tool, but it’s not one to take lightly. If you’re curious about whether a Roth conversion might work for you, I’d be happy to discuss your options and help you make an informed decision.

Planning ahead and exploring strategies like Roth conversions can make a significant difference in your retirement plan. Let’s work together to ensure your plan is as tax-efficient and aligned with your goals as possible.

Laurie Ingwersen, CFP®, CRPC^®, CDFA^®, CBC^®, CEPA^®

Partner Advisor

My father was a financial advisor who introduced me to the impact proactive planning can have on people’s lives at a very early age. At the same time, I also watched my mother struggle to make the right, forward-focused decisions after divorce—which ultimately led her to a life of financial insecurity. Forever moved by the sacrifices she made for us, I want to honor her by helping others avoid some of the mistakes she made. Now as a passionate financial professional myself, I strive to help others make sound financial decisions that expertly balance their priorities today and their future needs.

LEARN HOW I CAN HELP >>