When’s the Right Time for a Roth Conversion?

Key Takeaways  

• A Roth conversion can help you grow savings tax-free and provide tax-free qualified withdrawals in retirement but timing a conversion is critical.
• There are various situations when it may make financial sense to do a conversion, including during low-income years, before RMDs begin, or when leveraging a significant loss or deduction.
• Learn how CCMI helps clients determine their optimal break-even period, implement additional tax-saving strategies, and understand the tax consequences of a conversion.

Converting your traditional IRA to a Roth provides tax-free growth and qualified withdrawals in retirement. However, a Roth conversion is taxable, so strategically timing your conversion is essential in your tax planning. Learn more about tax planning while working and in retirement in this blog post. Let’s explore the opportune times to convert.

What is a Roth Conversion?

A Roth conversion involves converting a portion (or all) of your traditional IRA (a deferred tax account) to a tax-free Roth account. While you’ll pay taxes on the converted portion at the time of the conversion, the strategy can help reduce your future liability later and allow for tax-free qualified withdrawals in retirement. Contributions grow tax-free, and Roths do not have required minimum distributions (RMDs).

When Is the Right Time for a Roth Conversion?

Depending on your financial situation, there are various ideal timeframes to perform a Roth conversion:

• Low-Income Years: You can help reduce your liability on the taxable portion of your conversion during a low-income year while you’re still working or during retirement before you begin claiming Social Security.
• Before RMDs: Roth IRAs don’t have RMD requirements, so a Roth conversion can help you avoid futurewithdrawals that can continue growing tax-free. Learn more about RMDs in this post.
• Reduce Medicare IRMAA Surcharges: RMDs are part of your taxable income, which play a part in determining how much you pay for Medicare premiums. A Roth conversion can help reduce your RMDs and manage your future Medicare IRMAA surcharges.  
• Market Decline: If you convert  shares during a down market you can convert more shares at a lower tax cost.
• Anticipated Widowhood: If you’re filing taxes jointly but anticipate widowhood, you may consider converting to help avoid a higher tax bracket for the surviving spouse on the same income.
• Estate Planning: Roth funds can provide additional tax-free assets for your heirs.
• Significant Tax Losses or Deductions: You can leverage losses from a poor-performing business year or deductions of considerable charitable donations to help offset taxes on the conversion.

Considering a Roth Conversion? How CCMI Helps

We recommend partnering with your financial advisor or CPA to help determine the right timing, ensure you’re converting the appropriate amount, and understand your tax requirements and possible consequences. At CCMI, we often help clients navigate Roth conversions, guiding them through:

• Evaluating Timing: We can help you consider what makes sense to you, for example, converting before you sell a business or anticipate an income change.
• Calculating Break-Even Period: We can help you determine when future tax savings will outweigh what you pay in taxes now — or when you come out ahead. We can help you explore converting just enough to stay within a lower bracket each year to help pay a lower rate now than in the future.
• Strategic Deductions: We can help you understand how large deductions, depreciation, charitable contributions, and net operating losses can help offset your tax liability before a conversion.
• Managing Your Tax Bracket: We can help guide you through techniques to adjust your taxable income, such as deferring a bonus and accelerating expenses as a business owner to help generate a low-income year. Read other tax-planning strategies for business owners in this post.

Contact us if you’d like to learn more about when doing a Roth conversion is right for you.