I see a lot of clickbait articles on this subject, so I’d like to give you my version! Not only to review what it means, but more importantly, so you can rest assured this is something I evaluate for every retiree, every year.
A Roth conversion is essentially a choice to pay taxes on some of your IRA today in exchange for tax-free money later.
So why would anyone volunteer to pay taxes early?
Because there may be years when your tax rate is lower than it will be in the future.
This opportunity often appears after retirement but before RMDs begin. Your paycheck has stopped, your taxable income may be lower, and you have a window to move some IRA money into a Roth before future RMDs potentially push your income—and taxes—higher.
A Roth conversion may be especially worth exploring if you:
- Have a large IRA that could create significant future RMDs.
- Have room in your current tax bracket to recognize additional income.
- Can pay the conversion taxes from other assets.
- Don't expect to spend all of your IRA and may leave a significant balance to your heirs.
But there's a catch: the tax bracket isn't the only number that matters.
A conversion increases taxable income and can affect Medicare premiums through IRMAA, taxes on Social Security, investment taxes, and other parts of your financial picture. That's why we run the numbers rather than simply saying, “Roths are tax-free, so let's convert.”
And this isn't a one-time decision. A conversion that didn't make sense last year might make sense this year.
The goal isn't to avoid taxes. It's to have more control over when you pay them.
That's why Roth conversions are one of the strategies I revisit regularly as part of ongoing retirement and tax planning.
Source: Morningstar's IRA Conversion Fact Sheet
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Securities and Retirement Plan Consulting Program services offered through LPL Financial, a Registered Investment Adviser, Member FINRA/SIPC. Advisory Services offered through Western Wealth Management LLC, a Registered Investment Adviser, dba Kennebec Wealth Management. LPL Financial, Kennebec Wealth Management LLC and Western Wealth Management LLC are separate entities.