Is Now a Good Time for a Roth Conversion?

POSTED ON: August 18, 2022

A Roth conversion involves liquidating assets in a tax-advantaged account like a traditional IRA or 401(k), paying taxes on the withdrawal, and then funding a Roth IRA. In the short run, investors will pay taxes (more on that below).

Is Now a Good Time for a Roth Conversion?

There are many benefits to a Roth IRA, according to a recent article from Financial Advisor titled “Be Ready to Answer Questions About Roth Conversions In This Down Market.” Investors don’t pay taxes on future withdrawals and there are no minimum required distributions (RMDs) as there are for traditional IRAs and 401(k)s. Having to take an RMD after 72 and older can bump taxpayers into the next tax bracket, causing unwanted tax liability during retirement. You can also pass a Roth IRA onto an heir, as long as you meet the requirements, with no taxes to your heirs.

Why Doesn’t Everyone Have A Roth IRA?

Roth IRAs were originally created to expand the number of workers who had access to IRAs, while minimizing the short-term impact on the federal budget. They went into effect in 1998 and are named for William Roth, a U.S. Senator from Delaware. There are eligibility limits on Roth IRAs. Modified Gross Income must be under $144,000 in tax year 2022, and if married and filing jointly, MAGI must be under $214,000.

Benefits of Converting from a Traditional IRA to a Roth IRA

The best candidates for a Roth conversion are people who can afford to pay taxes due when funds are moved from a traditional IRA to a Roth IRA. Some people wait until they retire, when their income tax levels drop and paying the upfront taxes becomes more palatable.

If you don’t foresee needing all assets to pay day-to-day expenses in retirement and you have at least a moderate size IRA and brokerage account, a Roth IRA could be a good move. The same is true for someone who is years away from having to take RMDs (Required Minimum Distributions) or hasn’t yet filed for Social Security benefits.

Diversification of Tax Benefits and Burdens

If you have large retirement balances, it is often a good idea to have some that are Roth and some traditional.  So you shouldn’t convert all of your retirment funds into Roth accounts.  Why?  Because in retirement, you will have the option to “fill up” lower tax brackets  (at least the 10% and 15% brackets) with the traditional taxable retirement assets, and with the remainder, take tax-free Roth distributions putting them in the higher brackets.  This makes for good tax planning in retirement.  Your tax advisor or CPA can discuss with you an optimization program, and you can plan to take the appropriate distributions out at the end of the tax year to get the best tax result.  The point is, it is usually not advisable for your to go overboard and convert all your IRAs and 401(k)s into Roths.  Only convert some depending on what your top marginal tax bracket is at the time of conversion compared to your top expected tax bracket in retirement.  Getting a tax professional to help you with a strategy is the best approach.  So in answering the question”Is Now a Good Time for a Roth Conversion?”, you shouldn’t convert all of them into Roths.

Who Shouldn’t Do a Roth Conversion?

Most people who are working shouldn’t do a Roth conversion. Instead, they should wait until they are in a lower tax bracket before taking funds from an IRA, 401(k), SEP or other tax deferred accounts. Investors with modest IRAs and brokerage accounts won’t benefit as much as a Roth account.

When possible, conversions should also be done in smaller amounts, staggered over the course of several years.

Roth conversions are an excellent tool for estate planning. Heirs of Roth IRAs aren’t taxed on withdrawals, while they are taxed on withdrawals from traditional IRAs and have only a ten-year window in which to empty traditional accounts.

Speak with your estate planning attorney before embarking on a Roth conversion to be sure it is the best move for you from a tax and estate planning perspective. Aligning a Roth conversion with your estate plan will yield the best results.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Is Now a Good Time for a Roth Conversion?” read also these additional articles: What Does a Funeral Cost These Days? and Will Drinking Milk Prevent Dementia? and What are Mistakes to Avoid with Beneficiary Designations? and Are Testamentary Trusts a Good Idea?

Resource: Financial Advisor (July 6, 2022) “Be Ready to Answer Questions About Roth Conversions In This Down Market”

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