Is a Roth Conversion the Right Move for You?

By nbrown2628 | February 3, 2022
Is a Roth Conversion the Right Move for You?
This Strategy Comes with Many Benefits – But it Isn’t Right for Everyone

A significant part of retirement planning that is often overlooked is the tax strategy aspect. Too often, retirees find themselves blindsided and unprepared by how much they have to pay in taxes throughout retirement. One of the reasons for this is that, for many retirees, a significant portion of their retirement savings is in tax-deferred accounts such as an IRA or a 401(k). So, while they may not have had to pay taxes on the money they contributed, they’re now required to pay taxes on their money as they begin withdrawing from those accounts.

Because of this, many people are turning to Roth conversions in an attempt to reduce future tax liability. While you still have to pay taxes on any money that is moved from an IRA to a Roth account, once converted, your money can grow tax-free and be withdrawn from the Roth account tax-free, as well.

This may sound like the perfect option for anyone looking to lower their tax bill, but you’ve got to be discerning because converting money from an IRA to a Roth IRA isn’t necessarily the smartest move for everyone. Below, we’ll discuss whether or not a Roth conversion may be right for you.

When a Roth Conversion Might Be the Right Choice

There are several scenarios in which converting to a Roth may be to your benefit:

  • One of the reasons taxes take retirees by surprise is that retirees find themselves in a higher tax bracket than expected once they retire. This is due to the fact that, once you reach age 72, the IRS requires you to begin taking a certain percentage of your savings out of any retirement savings accounts you may have. When combining those withdrawals with any Social Security benefits you’re getting, any pension payments you’re receiving, on top of any other income you may have, there’s a chance your tax bracket gets bumped. If you feel that this may happen to you, then a Roth conversion could help ensure that you stay in your current tax bracket and avoid higher taxes.
  • If you’re retired, receiving a limited income on Social Security, and between the ages of 60-72, then you may want to consider a Roth conversion. Once you turn 72, you’ll be hit with required minimum distributions (RMDs) by the IRS, and tax law prohibits you from converting RMDs to a Roth IRA. So, if you’re interested in converting your money, you’ll want to do it before you hit that magic age.
  • If you’re looking to leave an inheritance behind and you don’t want your benefactors to have to foot a large tax bill, then converting your funds to a Roth IRA provides your money the opportunity to grow tax-free and be withdrawn tax-free once your heirs are ready to use it.

SEE ALSO: Four Ways You Can Avoid Retirement Tax Surprises

When You Might Want to Avoid a Roth Conversion

Despite its many benefits, there are scenarios in which a Roth conversion can actually have a negative impact on your finances:

  • If a significant portion of your income is tax-free, then a Roth conversion may end up leading to you having to pay more in taxes than you otherwise would have.
  • If you’re a high-income earner, you may want to reconsider converting your money. This is because any money you move from an IRA to a Roth IRA will be considered taxable income, so you’ll be paying even more in taxes.
  • If you’re depending heavily on Medicare, you run the risk of increasing your future premiums when you convert money from an IRA to a Roth IRA. This is because Medicare premiums are determined by your modified adjusted gross income from two years prior. So, any Roth conversions done in the previous two years could affect your future premiums.

SEE ALSO: Answer These Important Questions to Know When You Are Retirement Ready

Finding the Right Strategy for You

Ultimately, your financial plan should be unique to your financial situation and your financial goals. What’s good for one person may be completely detrimental to another simply because they have varying financial realities. What’s important is that you make the right choice for yourself – one that helps bring you closer to financial peace of mind and a comprehensive strategy to meet your goals.

It can be hard to understand the intricacies of the various savings accounts and how tax laws relate to them, so it might help to talk with a professional about what options are best for you. At Andersen Wealth Management, we are committed to helping you create a strategy that supports your retirement lifestyle and long-term financial goals. If you’d like to talk with one of our professionals about your retirement plans, schedule a call with us today.