A Roth conversion moves money from a traditional retirement account, where tax is usually owed on withdrawal, into a Roth account, where qualified withdrawals are usually tax-free. The catch is that the amount you convert is generally added to your taxable income in the year you convert it.
So the real question is not whether a Roth is good. It is whether paying tax now, at today’s rates and on today’s income, is likely to work out better than paying it later. That depends on the questions below, and the answers are personal.
1. What is your tax picture this year, compared with later?
Conversions tend to be worth a closer look in years when income is lower than usual: between jobs, early in retirement, or before other income such as pensions begins.
2. Where will the tax money come from?
Paying the tax out of the converted amount leaves less in the Roth. Paying it from savings outside the account keeps more invested, but only works if you have that cash without straining the rest of the plan.
3. How will the extra income touch other things?
Higher income in a conversion year can affect more than the tax rate. It may change some benefit costs, including Medicare premiums for people at or near that age, and eligibility for some credits.
4. When will you need the money?
Roth accounts carry their own timing rules for withdrawals. If you may need the money soon, check those rules with your tax preparer first.
5. Who is likely to inherit the account?
Heirs often face different tax situations from the original owner. Whether a Roth or a traditional account suits them better is part of the decision.
6. Would converting in smaller pieces work better?
Converting part of an account over several years can spread the tax and keep each year’s income in a range you are comfortable with.
7. Have you run it past your tax preparer?
A conversion is reported on your return, and once made it generally cannot be undone. Your CPA or tax preparer should see the plan before the money moves.
Grove can lay out the trade-offs for your situation and prepare notes for your preparer. The decision, and the filing, stay with you and them.
This article is general information for education. It is not personal investment, tax or legal advice; talk to a qualified professional about your own situation.
