Consider a Roth Conversion as You Near Retirement

roth conversion
Current Legislation Combined with Lower Tax Rates Makes Roth Conversions an Appealing Choice for Retirees

The closer you get to retirement, the more important it is to make the right strategic moves to help ensure you’re prepared for life once you leave the workforce. Given recent changes to legislation governing retirement plans and relatively low tax rates, it could be smart to utilize a Roth conversion as part of your strategy.

Below are answers to some common questions regarding Roth conversions to help you determine if it’s the right financial move for you.

Why a Roth conversion?

If retirees aren’t careful, the tax burden in retirement can be significantly higher than expected due to the tax burden from IRA withdrawals. Since any money contributed to traditional IRAs is pre-tax, those distributions are later subject to income tax when you make a withdrawal. Unlike traditional IRAs, qualified withdrawals from Roth IRAs are tax-free, which can be quite advantageous once you’re no longer working.

Keeping these tax concerns in mind, a Roth conversion begins to make a lot of sense, especially when you take into consideration current tax rates, which are fairly low. You’ll be taxed on any funds you move from your traditional IRA accounts into a Roth account when you convert, but any future withdrawals from your Roth IRA will be tax-free – no matter how much the account grows.

The greatest benefit of a Roth conversion is that it provides you the opportunity to spread out the taxes that you’ll incur on your retirement savings. So, the earlier you can begin converting your funds, the more time you’ll have to stretch out your tax burden, making it more manageable to pay. Additionally, the more money you can convert into a Roth IRA over time, the better the long-term benefits since your lower IRA balances will result in lower required minimum distribution (RMD) amounts in retirement – again resulting in a lower income tax burden.

SEE ALSO: A Strategy for Making the Most of Your Retirement Savings

Who would benefit most from a Roth conversion?

Even though Roth conversions come with an abundance of benefits, they’re not necessarily going to be the best option for everyone. However, they should be strongly considered by:

  • Individuals who are in their 60s and nearing retirement.
  • Individuals who have excess funds to cover the tax bill that will result from the conversion.
  • Individuals who are retired, between the ages of 60-72, receiving a limited income on Social Security.
  • Individuals looking to leave an inheritance behind who don’t want their heirs to have to worry about a large tax bill.

If you fall into one or more of these categories, begin exploring whether a Roth conversion could provide you with tax-savvy advantages.

How do inherited IRAs play into a Roth conversion?

Previously, if someone inherited an IRA, despite still being required to take taxable distributions, the beneficiary was allowed to stretch those distributions out over their lifetime. This allowed beneficiaries the freedom to make sure the distributions didn’t negatively impact their tax strategy in a significant way. However, the SECURE Act changed this by requiring beneficiaries of IRAs to withdraw all the money from the accounts by Dec 31st of the year that contains the 10th anniversary of the original IRA holder’s date of death. The result is making an already tax-inefficient item even more inefficient by accelerating taxable withdrawals.

So, in the case of an inherited IRA, a Roth conversion could help the beneficiary minimize the tax impact – especially because tax-free withdrawals from an inherited Roth IRA extend to the beneficiary’s children.

SEE ALSO: Is a Roth Conversion the Right Move for You?

Making a Roth conversion work for you.

At the end of the day, each person’s financial situation and goals are unique. That’s why you need a unique financial planning strategy to properly prepare for retirement, too. Deciding whether a Roth conversion is right for you is something that only you and your advisor can determine. However, if you fit into any of the categories listed above, you may seriously benefit from such a conversion. What’s most important, though, is making a choice that brings you closer to financial stability and confidence in knowing you’ll be taken care of throughout the entirety of your retirement.

If you’d like professional guidance on whether a Roth conversion is right for you, we can help. At Andersen wealth management, helping you meet your financial needs is our first priority. It’s our goal to make retirement a time of excitement – not of concern. If you’re ready to take the next step in planning your retirement, contact us today to start a conversation. We look forward to hearing from you!