Should you do a Roth conversion?

The Roth option is rightfully celebrated. Like traditional IRA and 401(k) accounts, Roth earnings grow with no current taxation. But unlike traditional retirement accounts, Roth accounts have no lifetime RMDs, and Roth contributions / earnings are not just tax-deferred, they are tax-free.

Even if you do not have significant percentage of your retirement wealth in Roth accounts - due to high earnings or the fact that the Roth option was not available or on your radar screen – it may still be an option for you, using a Roth conversion.

Is a Roth conversion right for you? Like most things, it depends.

Roth conversion – general pro’s and con’s

A tax-free source of funds for retirement income or estate planning is a huge benefit, no doubt. And Roth conversion is a fairly simple process, using an in-plan election or a simple rollover or trustee-to-trustee transfer from a traditional IRA/401(k) to a Roth IRA or 401(k).

The primary disadvantage of a Roth conversion is that it is a taxable event (which requires payment of tax) and increases your AGI (which can impact Social Security and Medicare benefits).

Running the Numbers is Key

Whether, when, and to what extent a Roth conversion works depends on your personal situation, including your tax bracket at the time of conversion, the amount being converted, your other earnings, losses, and deductions, and your assets (preferably not tax-advantaged assets) available to pay the tax.

So, it is critical to carefully plan a Roth conversion, including running the numbers of various scenarios. Some key considerations to discuss as part of the planning process include:

• Breaking up Roth conversion(s) into a multi-year plan, stretching over 2 or more tax years to spread out the tax cost or stick to a tax budget.
• Matching Roth conversion(s) to tax years in which you have low income can harvest significant losses, or have significant deductions, such as when you “bunch and batch” charitable deductions to fund a DAF or QCD.
• Coordinating Roth conversion(s) with your overall retirement strategy, including whether to do an in-plan Roth conversion when you’re working past normal retirement age; considering how to mitigate higher taxes on Social Security benefits or higher Medicare premiums in the conversion year; and weighing the short-term impact on Social Security / Medicare against reducing or eliminating RMDs going forward. (The SECURE Act 2.0 increases in age for beginning RMDs may provide more time to analyze and execute a conversion strategy.)
• Testing how a Roth conversion might impact your estate plan, especially if named beneficiaries of your IRA or 401(k) assets are subject to the 10-year RMD rule (e.g. children, grandchildren, and others who don’t qualify as disabled, chronically ill, or ten years younger than the IRA owner).

Roth conversions – like everything else – are only a tool to reach your personal goals

Roth IRA conversions can be a powerful tool, but not one that everyone needs or wants. It's important to work with a qualified wealth advisor, and your team of tax professionals and attorneys, to talk through your options, so you can make an informed decision about whether, when, and how a Roth strategy might help you reach your goals.

Washington Trust is here to help.