Roth IRA Conversions: A Strategic Retirement Tool

Roth IRAs provide incredible tax benefits but are often viewed primarily as a retirement planning tool for younger investors. Because there are income limits for making contributions, it’s generally assumed that people in the earlier stages of their career are the only ones who can take advantage of them. However, investors close to retirement (or in retirement) can add to their Roth IRAs by using conversions instead of contributions. Here’s how strategic Roth IRA conversions can be used in your retirement planning.

Converting Traditional IRA Assets Into Roth IRA Assets

Once in a Roth IRA, your investments grow tax-free, there are no required minimum distributions, and any distributions are not taxed. These benefits make Roth IRAs an attractive part of a successful retirement plan. The tax benefits also offer you one more lever to pull in order to manage your retirement income in a tax-efficient way.

Traditional IRAs and 401(k) plans require you to start taking distributions at age 72. These are known as required minimum distributions (or RMDs) and, of course, they are taxable. The RMD amount increases slightly each year over time. Uncle Sam let you defer taxes on those funds and now he wants that tax revenue! Since these distributions are taxed at ordinary income rates, they can potentially increase your marginal tax rate in any given year, depending on your other sources of income.

By making Roth IRA conversions on a portion of these accounts, you reduce your RMDs (therefore reducing your future taxes). They also give you the flexibility to keep more assets in longer-term or illiquid strategies, since there isn’t a need to plan for distributions beyond what you need for income.

Roth IRAs can also make estate planning easier. The SECURE Act, signed in 2019, ended the so-called “stretch IRA” provisions, which allowed anyone who inherited a traditional IRA to stretch their RMDs across their life expectancy. All assets in inherited traditional IRAs must now be distributed within ten years, which will result in higher taxes for your beneficiaries.

When To Convert

To avoid a spike in income in a year you make Roth IRA conversions, it may make sense to create a plan to space the Roth IRA conversions over the course of several years. A jump in income in one particular year can impact your Social Security taxes and potentially subject you to a Medicare surtax.

There are two scenarios where making Roth IRA conversions make sense. The first is if you experience a year with a lower-than-normal income. If you’re a sales professional and are compensated only with incentive income, having a down-year may come with a silver lining. Having a lower marginal tax rate gives you the opportunity to make Roth IRA conversions with a lower tax bill.

Likewise, if you’ve retired and your income is much lower than in your working years, making annual Roth IRA conversions part of your retirement tax planning is a great strategy. For some clients I’ve worked with in the past, we were able to make Roth IRA conversions at rates that they wouldn’t have dreamed possible.

In both instances, a good practice is to work with your CPA to determine the amount you can convert. Ideally, the Roth IRA conversion takes you up to the top of your current marginal tax bracket without pushing you into the next one.

Whether you set up a Roth IRA early in your career or not, it can still be a fantastic strategic planning tool for your retirement. Be sure to talk with your financial advisor and CPA to figure out how to add strategic Roth IRA conversions to your annual financial planning process.

If you’d like help figuring out if Roth IRA conversions are right for you, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

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