The way your retirement savings are taxed can have a big impact on how much you ultimately keep. A Roth conversion may help you take more control over that tax bill by choosing when to recognize the income and pay the tax.
For some people, paying taxes on part of their retirement savings today can create more flexibility in the years ahead. For others, the immediate tax cost may not make sense.
The right answer depends on your income, tax situation, retirement plans, and other financial goals.
What Is a Roth Conversion?
A Roth conversion moves money from a traditional IRA or another eligible retirement account into a Roth IRA.
Typically, when you convert money from a pre-tax retirement account, such as a traditional IRA, to a Roth IRA, the amount converted is included in your taxable income for that year.
According to IRS guidance on Roth IRA conversions, there is no income limit on who can convert eligible traditional IRA assets to a Roth IRA.
Once the money is in a Roth IRA, qualified withdrawals are tax-free under IRS rules. Roth IRAs also do not require minimum distributions during the original account owner’s lifetime.
When Does a Roth Conversion Make Sense?
A Roth conversion may make sense during a year when your taxable income is lower than usual, especially if you expect your income or tax rate to be higher in the future.
For example, someone who retires before beginning Social Security or required minimum distributions may have several years when their taxable income drops. A career change, business transition, or other change in income could create a similar opportunity.
Converting does not have to be an all-or-nothing decision. A portion of an IRA can be converted, which may allow the account owner to spread conversions across several tax years.
The decision should come down to whether the current tax cost fits with your expected income, future tax situation, and broader financial plan.
What Should You Consider Before Converting?
The added taxable income from a Roth conversion can affect your overall tax picture for the year. The amount converted, your other income, current tax bracket, and the cash available to pay the tax should all be considered.
Required minimum distributions also matter. If you are required to take an RMD for the year, the required distribution must be taken and cannot itself be converted to a Roth IRA. The IRS provides additional guidance on RMDs and Roth accounts.
At CPC Wealth Management, we help individuals and families evaluate how a Roth conversion fits with their retirement income, investments, taxes, estate planning, and long-term goals.
Considering a Roth conversion? Start a conversation with an advisor to see how it may fit into your unique financial situation.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
CPC Wealth Management and LPL Financial does not provide legal advice or services, or tax advice or services.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. CPC Wealth Management is not an affiliate company of LPL Financial.
