Making Sense of Roth Conversions: Tax Strategy, Trade-Offs, and Who Benefits

Long-term tax planning plays a major role in retirement strategy, and one tool gaining attention is the Roth conversion. A Roth conversion moves funds from a tax-deferred account – such as a traditional IRA or 401(k) – into a Roth IRA. The converted amount is treated as taxable income in the year of the conversion, but once in a Roth, future growth and qualified withdrawals are tax-free.

Benefits of a Roth Conversion

A Roth conversion can offer several long-term advantages:

• Tax-Free Withdrawals in Retirement

Once converted, all qualified withdrawals – including growth – are tax-free.

• No Required Minimum Distributions (RMDs)

Unlike traditional IRAs, Roth IRAs don’t require lifetime withdrawals, allowing assets to grow longer.

• Lower Future Tax Liability

Reducing taxable account balances may help lower future tax brackets, Medicare premiums, and taxable Social Security income.

• Estate Planning Advantages

Roth IRAs allow tax-free inheritance.

• Hedge Against Rising Tax Rates

Paying taxes at today’s known rate would be beneficial if future tax rates increase.

Drawbacks to Consider

A Roth conversion also comes with potential downsides:

• Taxes Due Up Front

The converted amount is taxable income and may push you into a higher tax bracket.

• Short-Term Financial Impact

Higher reported income may affect Medicare premiums, financial aid, or tax credits.

• May Not Benefit All Retirees

If you expect a lower tax bracket in retirement or anticipate donating RMDs to charity, the benefit may be limited.

The Opportunity Cost

Paying conversion taxes today means those dollars cannot be invested elsewhere. For some investors, the lost compounded growth on that tax payment may outweigh the benefit of converting. Evaluating this trade-off alongside tax projections is essential.

Who Is a Good Fit?

A Roth conversion may make sense if you:

• Expect higher future tax rates
• Have non-retirement assets available to pay taxes
• Want to reduce future RMDs
• Prioritize tax-efficient estate planning

It may not be right if you cannot comfortably pay the tax bill, expect lower tax rates later, or a conversion would significantly spike your current taxable income.

A Roth conversion can be a powerful planning tool – but timing, tax rates, and cash flow matter. Whether you’re considering a partial conversion, a multi-year conversion strategy, or simply evaluating if a Roth conversion is right for you, our team can help guide you through the process with clarity and confidence.