Is Now the Time to Convert to a Roth IRA?

With concerns about potential income tax increases, many are exploring strategies to protect their retirement savings from higher taxes. A Roth conversion, the process of transferring funds from a Traditional IRA or 401(k) into a Roth IRA, can be an effective strategy to leverage tax-free growth. But is it the right move for you?

Here’s what to know about Roth conversions: what they are, how they work, the benefits they can offer, and considerations to help you determine if converting your Traditional IRA or 401(k) to a Roth IRA aligns with your financial goals.

Understanding a Roth Conversion

A Roth conversion involves moving funds from a Traditional IRA or 401(k) into a Roth IRA. Unlike Traditional IRAs or 401(k)s, which are funded with pre-tax dollars, Roth IRAs are funded with after-tax dollars. This means that, after converting and paying taxes on the conversion amount, your money grows tax-free in the Roth account, and any future withdrawals are generally tax-free as well.

Why Consider a Roth Conversion Now?

Given potential tax changes on the horizon, a Roth conversion may be beneficial if you:

• Anticipate higher tax rates in the future: If you expect rates to increase, converting now while rates may be lower could save you in the long run.

• Want to minimize Required Minimum Distributions (RMDs): Traditional IRAs and 401(k)s require RMDs beginning at age 73, whereas Roth IRAs do not. This allows your investments to continue growing tax-free.

• Have a longer retirement horizon: With years before retirement, a Roth conversion offers more time for tax-free growth, potentially offsetting the tax impact of converting.

Key Benefits of a Roth Conversion

• Tax-Free Growth and Withdrawals: After converting to a Roth IRA, any growth in the account is tax-free, and qualified withdrawals (those made after age 59½ and at least five years after the conversion) remain untaxed. This can make a Roth IRA an effective tool for estate planning, allowing you to pass on wealth tax-free.

• Control Over Retirement Income: Since Roth IRAs do not require RMDs, you can decide when and if you want to withdraw funds, giving you flexibility in structuring income to be more tax-efficient in retirement.

• Estate Planning Advantages: Roth IRAs are passed to beneficiaries tax-free, which could result in substantial tax savings for your heirs compared to inheriting a Traditional IRA or 401(k).

When a Roth Conversion Might Not Be Ideal

While a Roth conversion offers many benefits, it may not be suitable in every situation:

• You expect a lower tax rate in retirement: If you’re nearing retirement and anticipate lower taxable income, it may be more beneficial to wait rather than pay taxes on a conversion now.

• You need retirement funds to cover the conversion tax: The most efficient way to convert is to pay taxes with non-retirement funds. Using retirement funds to cover the tax can reduce your savings and limit growth.

• Your investment horizon is short: Roth conversions are generally more advantageous over a longer timeline, allowing time for tax-free growth. With only a few years until retirement, the benefits may not outweigh the costs.

A Roth conversion can be a powerful tool in retirement planning, but timing and strategy are key. Working with a financial advisor can help you determine if a Roth conversion aligns with your goals, tax situation, and retirement income strategy.

If you’re considering a Roth conversion or want to understand how it fits into your retirement plan, feel free to reach out. We’re here to help you navigate your options and create a strategy tailored to your future.