This strategy is not for everyone, but everyone should explore this tax savings opportunity. It may fit your financial situation.
When to Consider a Roth Conversion
- If you think your future tax rate will be higher, convert now and pay a lower tax rate. The key is to look out into your retirement years.
- Your income is too high, and you cannot contribute to a Roth IRA. Convert IRA funds now to a Roth IRA and create a bucket of tax-free money for future use, allowing for tax diversification later.
- You have a goal to minimize taxes over the next 20 to 30 years on your retirement savings accounts. You are looking to eliminate or reduce the “tax torpedo” when required to take large minimum distributions (RMD’s). For those with large, qualified nest eggs, future tax brackets could be as high as 32-35%.
- You are planning significant charitable contributions or establishing a donor advised fund for future giving.
- Your intention is to leave your heirs a tax-free inheritance.
What to Understand about a Roth Conversion
Five-Year Rules Apply
- There is a five-year rule and 10% penalty if money is withdrawn within the first five years. Each conversion has its own five-year clock.
- The converted amount will increase your taxable income which may impact how much of your Social Security benefit is taxed and the rate for your Medicare premiums. (Medicare rates reset each year.)
Establishing a Roth IRA through conversions can be a valuable planning tool used to create a tax-free source of income in retirement. Conversions are not just for those who are approaching retirement. Opportunities may arise throughout one’s financial lifetime and with proactive financial planning you may be able to fully optimize on them.
Read more: What Is A Roth Conversion? – Forbes Advisor