Understanding Roth Conversions: A Smart Move for Your Retirement?

Written By AUSTIN FARMER

When it comes to retirement planning, one of the most powerful strategies you can use is a Roth conversion. This move involves transferring money from a traditional IRA or 401(k) into a Roth IRA. While you’ll pay taxes now on the converted amount, the big benefit is that future growth and withdrawals in retirement are tax-free (as long as certain rules are met).

 

What Is a Roth Conversion?

A Roth conversion shifts funds from a tax-deferred account (traditional IRA/401(k)) to a tax-free account (Roth IRA). Since contributions to traditional accounts are typically pre-tax, you’ll owe income taxes on the amount converted. After that, the money grows tax-free forever.

 

Why Consider a Roth Conversion?

  1. Tax-Free Withdrawals in Retirement – Once converted, qualified withdrawals from a Roth IRA are completely tax-free.

  2. No Required Minimum Distributions (RMDs) – Unlike traditional IRAs, Roth IRAs don’t require you to take distributions at age 73.

  3. Lower Taxes in the Future – If you expect your tax rate to rise (due to income growth, law changes, or retirement timing), paying taxes now at a lower rate can save you money.

  4. Estate Planning Benefits – Roth IRAs can pass tax-free to heirs, making them an efficient tool for legacy planning.

 

When Does a Roth Conversion Make Sense?

  • Low-Income Years: Converting during years when your income (and tax bracket) is lower can minimize the tax hit.

  • Market Downturns: Converting when account values are temporarily lower means paying taxes on a smaller amount.

  • Before Retirement: Many people convert after leaving a job but before Social Security and RMDs kick in, to take advantage of lower taxable income.

 

Potential Drawbacks

  • Upfront Taxes: Conversions can create a large tax bill in the year you convert.

  • Impact on Benefits: Higher taxable income from the conversion can affect Medicare premiums or taxability of Social Security.

  • Cash for Taxes: Ideally, you want to pay conversion taxes with funds outside the retirement account to maximize tax-free growth.

 

How to Do a Roth Conversion

  1. Contact your IRA or 401(k) provider and request a Roth conversion.

  2. Decide how much to convert – partial conversions over several years can help manage tax brackets.

  3. Set aside money to pay the taxes.

  4. File IRS Form 8606 with your tax return to report the conversion.

 

Bottom Line

A Roth conversion can be a powerful tax strategy, but it’s not a one-size-fits-all move. Your age, tax bracket, income, and retirement goals all play a role in whether it makes sense. Consider running projections or working with a financial planner or CPA to determine the right timing and amount for your situation.

 

 

 







Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should consult with their qualified legal, tax, and accounting advisors before implementing any strategy discussed herein. CRN202711-9162284.

AUSTIN FARMER