December 06, 2024
Allworth financial advisor Michael Coates, CFP®, explains how Roth conversions can create tax-free income in retirement, providing financial flexibility and a meaningful strategy for reducing future tax burdens.
When it comes to planning for retirement, taxes are one of the biggest factors that can impact your long-term financial success. After all, the money you’ve worked so hard to save isn’t truly yours until Uncle Sam takes his share. That’s why strategies like Roth conversions can play such an important role in creating a tax-efficient retirement—and even better, they can give you access to tax-free income down the road.
If you’ve heard about Roth conversions but aren’t sure if they’re the right move for you, let’s break it down in plain terms. Here’s what a Roth conversion is, how it works, and why it might be worth considering as part of your financial plan.
A Roth conversion is simply the process of transferring money from a traditional IRA or 401(k) into a Roth IRA. When you do this, you’ll pay taxes on the amount you convert at your current income tax rate. While paying taxes upfront might not sound appealing, the big advantage is that once your money is in a Roth IRA, it grows tax-free—and, perhaps even more important, your withdrawals in retirement will also be tax-free.
This means no worrying about future tax rates or how much you’ll owe on the income you’re relying on to fund your retirement dreams.
There are a few reasons why a Roth conversion might be a smart move for you, depending on your current and future tax situation.
Timing is everything when it comes to Roth conversions. Here are a few scenarios where it might make sense for you:
It’s also worth noting that partial Roth conversions are an option. You don’t have to convert your entire traditional IRA or 401(k) at once; you can convert smaller amounts over time to manage your tax burden strategically.
As great as Roth conversions can be, they aren’t a one-size-fits-all solution. Here are a few things to keep in mind before making the decision:
Deciding whether a Roth conversion makes sense depends on your unique financial situation, tax outlook, and retirement goals. The key is to think long-term: Will paying taxes now lead to greater savings and flexibility in the future? How will a conversion fit into your overall retirement income plan?
As with any major financial decision, it’s important to weigh the pros and cons and work with a financial advisor to ensure it aligns with your broader strategy.
Many of the clients I work with choose me because I’m a collaborative financial partner during the later years of their careers. When you’re in the final era of your work life, you need an equitable relationship with your financial advisor, so you feel empowered to make educated decisions that set you up for lasting financial success.
If you’re feeling uncertain about how to prioritize your goals, I’ll help to develop a path to get you to retirement in the most efficient way possible.
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