Should You Consider Doing A Roth Conversion?

There are a lot of important considerations to weigh before doing a Roth conversion, and it would be wise to include your tax planning professional to help determine whether this strategy is right for you. The "Should I Consider Doing A Roth Conversion?" flowchart addresses the key issues to help guide the Roth conversion decision-making process....
David Roberts
August 16, 2022
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Although Congress failed to pass President Biden’s economic legislation in 2021 as originally planned, they are still on track to pass an alternate version of the Build Back Better Act in 2022. Still on the table within the legislation are proposed limits on Roth conversions for high earners and a prohibition of the “back-door” Roth conversion for all income levels. These are attractive tax planning strategies for folks who believe their tax rate may be higher in retirement, or for those who just want the flexibility that tax-free income provides.

With America’s soaring national debt and record deficits, it’s important to keep in mind that the country’s bill is going to come due at some point, and taxes will have to be raised. When income tax rates rise, some of the hardest hit will be folks who have substantial savings that have never been taxed (e.g., 401k, traditional IRA). These tax-deferred savings accounts are ticking, tax time bombs.


Many people look at the growing balances in their 401k and IRA, not realizing that a sizable chunk of that will be owed right back to IRS. Whether you need the money or not, you will be required to start receiving minimum distributions at age 72, and you won’t know your future income tax rate until you get there. With a Roth conversion, you are buying a future 0% income tax rate for those distributions. Furthermore, you will be removing the uncertainty of what future tax rates would do to your nest egg otherwise.

Some people suspect that when they retire, they will be in a lower tax bracket. Or they’re planning to pass their savings on to heirs who will be in a low bracket. Even when that is true, we don’t know what the low bracket will be in the future. It might be significantly higher than today’s low bracket. Remember, we’re in the lowest tax rate environment we’ve seen in this country in a lifetime. So, we’re just gambling on whether our future income tax rate, or that of our beneficiaries, will be lower, higher or the same.

However, there may be a consolation prize if you lose that bet. Let’s say you bet on taxes being higher in the future, and you convert your tax-deferred assets to Roth, paying the income tax on the conversion. If your future income tax rate winds up being lower, withdrawals from your retirement savings will still be tax-free. That’s your downside, and it’s a pretty nice situation for any retiree.

Should you consider a Roth conversion?

Since the changes to Roth conversions have yet to be passed, it would be wise to evaluate whether it makes sense for you to move tax-deferred funds to a Roth IRA before it is no longer an option. You’ll pay income tax on the funds transferred, but there is no early withdrawal penalty, and all future growth will be income tax-free.

The other big benefit of the Roth IRA is there are no required minimum distributions. You never have to take that money out. It grows tax-free forever, including after you die – even now under the new SECURE Act. Your non-spouse beneficiaries will be subject to the 10-year payout, but they’ll pick it up income tax-free since you already paid the tax.

Issues to consider and a helpful resource

There are a lot of important considerations to weigh before doing a Roth conversion, and it would be wise to include your tax planning professional to help determine whether this strategy is right for you. The “Should I Consider Doing A Roth Conversion?” flowchart addresses the key issues to help guide the decision-making process.

Contact me to receive a FREE copy of this resource.

This flowchart covers:

  • Changes in marginal tax rates for clients (or their heirs)
  • Ability to pay the associated tax with cash outside the retirement account
  • Five-year rule implications
  • Impact of income-based programs (IRMAA)

Final thought

Protect the future you envision by staying the course and making the most of this fluid legislative environment. Doing so not only helps give you the best odds of achieving your most important financial goals, but hopefully will provide some valuable peace of mind in these volatile times.

Developing and implementing a thoughtful tax-savings strategy can be cumbersome. When leveraging tax savings opportunities, partnering with a financial advisor is extremely beneficial. I would like to discuss the “Should I Consider Doing A Roth Conversion?” flowchart with you, plus give you some practical tips you can use to take control of your finances. Contact me to receive a FREE copy of this resource.

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