6 Questions to Ask Before Making a Roth IRA Conversion


With tax-free growth and tax-free distributions, Roth IRAs can be a wonderful way to fund retirement. Unfortunately, it’s not easy to get your money into these accounts in the first place. Converting some (or all) of your traditional IRA into a Roth IRA is tempting, but does it make sense? Here are six questions to ask before making a year-end Roth IRA conversion.

(BONUS: Be sure to read to the very end for a special strategy only available in 2020!)

1. Do You Expect Your Income To Be Higher In Future Years?

For high earners who are consistently in a high tax bracket year after year, a Roth IRA conversion may not be a smart strategy. Instead, work to maximize tax-deferred savings into traditional retirement accounts such as your IRA, 401(k), or other employer plans.

However, if your income this year is lower than you would normally expect it to be going forward, it may be a good time to consider a conversion.

For example, someone who has been furloughed, lost their job or seen their incentive or bonus compensation reduced this year could see their effective tax rates drop in 2020. Of course, any consistent earners who weren’t in high tax brackets to begin with may be great candidates as well.

2. Do You Expect To Be In A Lower Tax Bracket In Retirement?

Similar to Question 1, if you expect to be in a lower tax bracket in retirement, then a Roth IRA conversion may not be an ideal strategy for you at this time. Instead, focus on those tax-deferred savings to reduce taxes today.

You can always revisit this strategy in retirement when your taxes are lower.

3. Do You Have Enough Cash To Pay The Taxes?

Remember, you’ll still owe taxes on any amount you convert. If a Roth conversion looks favorable, then you need to ensure that you can pay for the tax bill when it comes. You certainly don’t want to be in a position where you’ll need to liquidate other assets in order to meet your tax liability.

If you have sufficient cash on hand to pay the tax bill, then a conversion is still a possibility.

4. Will You Need The Money Within 5 Years?

Roth IRAs are great, but they come with a handful of odd rules. Specifically, Roth IRAs have what are known as “5 Year Rules”, one of which is that you aren’t allowed to withdraw funds from the Roth IRA within 5 years of the first deposit.

The withdrawal rules can be complicated and would make a great topic for a future blog post.

If you think you may need to access the Roth IRA funds within five years of your conversion, then be cautious. You certainly don’t want to run afoul of these rules and incur penalties that could wipe out the benefit of making the conversion in the first place.

5. Are You Age 63 Or Older?

A Roth IRA conversion can increase your taxable income – and therefore could potentially increase your monthly Medicare premiums. Medicare means testing has a two-year look back, so if you’re age 63 or older, then proceed with caution before making a Roth IRA conversion.

Be sure to keep an eye on your Modified AGI to avoid this bump in Medicare Part B premiums. You can do this by limiting your conversion amount so that you keep your Modified AGI below the next premium adjustment threshold.

6. Is The Market Down?

If you’ve gotten this far and a Roth IRA conversion may still make sense for you, the final consideration would be the relative value of your investments. If your portfolio is down a bit, then you may have the opportunity to convert while things are “on sale”.

Of course, it’s nearly impossible to time the market perfectly, so the entire strategy shouldn’t hinge on whether the stock market is up or down. Any conversion should still make sense regardless of asset valuations.

How Much Should You Convert?

If you’ve answered these six questions and a Roth IRA conversion still makes sense, it’s time to start thinking about the amount to convert. This is a great time to bring in your financial advisor and CPA to help you.

Typically, the amount of an opportunistic Roth IRA conversion will be the amount that takes you to the top of your current tax bracket – but does not push you into the next one. Just remember – tax brackets are marginal. If you go $1 into the next tax bracket, only that $1 is taxed at the higher amount. So, don’t stress if you go a little over.

Bonus Roth IRA Conversion Strategy For 2020

If you’re retired and have been taking Required Minimum Distributions from your retirement accounts, 2020 offers a unique opportunity for you. As you may know the CARES Act has suspended RMDs for retirement accounts this year. That means that you may be in a lower tax bracket in 2020.

If you don’t need the money you would normally take out of your IRA, then you may want to consider making a partial Roth IRA conversion, depending on your tax situation. It’s potentially a great move if you were already planning to leave money in your retirement accounts this year.

Of course, please consult with your financial planner and CPA to confirm if this strategy would work for you.

If you’re considering a Roth IRA conversion and would like to talk it over, then click here to set up a quick, complementary introduction call to see if Prana Wealth is a good fit.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. We’ve helped many clients make strategic Roth IRA conversions in the past and we’re here to help you when you’re ready.

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