Should You Make a Roth Conversion?

We are wrapping up the last points in this series, arming you with practical tips to navigate the complex landscape of taxation.  

Last week I emphasized the importance of maintaining a lower tax bracket. Roth conversions are one simple, yet complex strategy to help manage your tax bracket over the long term.

When you convert traditional retirement accounts to Roth accounts, you can potentially reduce future tax obligations and provide greater flexibility in retirement planning. These conversions make the most sense if you expect to be in a high tax bracket when you start taking withdrawals versus at the time they are converted, typically when you are still working.

There are multiple benefits to converting your 401(k) dollars to Roth IRAs including: 

1. Roth IRAs enjoy tax-free growth without the required minimum distributions (RMDs).
2. Roth IRAs diversify your “tax buckets” of investments between taxable, tax-deferred, and tax-free accounts. This gives you the flexibility to choose which account to draw from in retirement, based on your income needs in relation to your marginal tax rate. 
3. Roth IRAs potentially minimize future Medicare premiums. 
4. Roth IRAs provide a tax-free legacy to your heirs. Traditional and Roth IRA non-spouse beneficiaries are subject to the 10-year rule (some exceptions apply) which requires complete distribution (a taxable event for traditional IRAs) of the account by the end of the 10th year of inheritance. Converting to a Roth could prevent a significant tax burden for your beneficiaries, especially if they are already in a high tax bracket.

Making a Roth conversion is not always a straightforward strategy. These conversions may push you into a higher tax bracket, you may have higher Medicare premiums and a higher portion of Social Security benefits can be taxed during conversion years.

Timing is Everything

Incorporating Roth conversions at the right time is key to successful financial planning. Working with a tax professional and financial advisor can help determine if and when these conversions make sense.

If you’d like to connect on more ways to reduce your taxes during retirement, schedule a complimentary strategy call with me. Let’s get you on the right track to financial freedom in retirement.