Understanding Roth Conversions: Is Now the Right Time for You?

 

Roth IRA conversions have become one of the most talked-about financial planning strategies in recent years. With changing tax laws, market volatility, and shifting retirement timelines, many investors are wondering if now is the right time to take action. Let’s break down what a Roth conversion is, the potential benefits, risks to consider, and the steps you can take to decide if this strategy fits into your financial plan.

 

What Is a Roth Conversion?

A Roth conversion is the process of moving funds from a traditional IRA or 401(k) into a Roth IRA.

• In a traditional retirement account, you contribute pre-tax dollars, and your withdrawals in retirement are taxed as ordinary income.
• In a Roth IRA, contributions are made with after-tax dollars, and withdrawals in retirement are tax-free, provided certain rules are met.

When you convert, you’ll pay income taxes on the amount moved, but once inside the Roth, those dollars grow tax-free.

 

Advantages of a Roth Conversion

1. Tax-Free Withdrawals in Retirement
   Your future withdrawals won’t be subject to federal income tax, which can be a major advantage if you expect tax rates to rise.
2. No Required Minimum Distributions (RMDs)
   Unlike traditional IRAs, Roth IRAs don’t require withdrawals starting at age 73, giving you more flexibility in managing retirement income.
3. Estate Planning Benefits
   Roth IRAs can be passed down to heirs income-tax free, making them a powerful legacy planning tool.
4. Locking in Today’s Tax Rates
   If you believe your tax bracket may be higher in the future, either because of income or changes in legislation, converting now could help you pay taxes at a lower rate.

 

Risks and Considerations

1. Immediate Tax Bill
   The amount you convert is treated as taxable income in the year of conversion. Depending on the size of the conversion, this could bump you into a higher tax bracket.
2. Cash Flow Needs
   You’ll want to make sure you have funds outside your retirement account to cover the tax bill. Paying taxes with retirement assets can diminish the long-term benefit.
3. Timing and Market Volatility
   Converting during a market downturn may reduce your tax bill, since the account value is temporarily lower. But future market swings may still impact overall outcomes.
4. State Taxes
   Don’t forget to consider your state income tax rates, which may significantly affect the cost of conversion.

 

Steps to Take Action

1. Evaluate Your Current and Future Tax Brackets
   Work with your advisor to estimate the impact of paying taxes now vs. later.
2. Decide on a Conversion Amount
   Some people choose to convert gradually, spreading the tax liability over several years.
3. Run the Numbers
   A financial plan can model whether a conversion makes sense for you, factoring in your income needs, tax projections, and legacy goals.
4. Coordinate with Your CPA
   Taxes are central to this strategy, so it’s critical to work closely with your tax professional before making any moves.
5. Implement Strategically
   Consider converting in years with lower income, during market pullbacks, or before major life events (like retirement) that could change your tax situation.

 

The Bottom Line

A Roth conversion can be a powerful tool, but it’s not right for everyone. The key is aligning the strategy with your personal goals, tax picture, and retirement timeline. With thoughtful planning and the right guidance, you can decide whether locking in tax-free income for your future is the right step today.

 

If you’re curious about whether a Roth conversion makes sense for you, we’d be happy to run the numbers and explore the possibilities together.

 

 

This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.

Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.