When planning your retirement income, limiting taxable consequences is a priority. A Traditional IRA or 401(k) provides pre-tax retirement savings, which trigger income taxes whenever a withdrawal is made. On the other hand, a Roth IRA offers after-tax savings that grow tax-free and are tax-free upon qualified withdrawals. This fundamental difference is why many investors seek Roth IRA savings even after retiring.

Additionally, Roth accounts may provide tax-free inheritances if the funds are never used. Roth IRAs do not require minimum distributions throughout retirement, so this type of account offers greater flexibility. The Roth IRA Conversion process is the movement of pre-tax IRA savings into an after-tax Roth IRA account. As a result, investors can enjoy the benefits of tax-free growth and flexibility moving forward. In this article, we explore Roth IRA conversions, the tax implications, and how to decide whether a conversion is right for you.


How a Roth Conversion Works

The biggest downside to this strategy is that income taxes will be due on the amount transferred. Because of this, we only recommend Roth Conversions for those investors in lower tax brackets. For example, if you are reporting $200,000 a year of income, then converting another $50,000 does not provide much benefit since this conversion would be taxed at a very high bracket. However, if you are earning less than $100,000, this could be a great strategy to consider. The best-case scenario is a retired individual with enough savings at the bank to fulfill all their income needs for the year. Retired individuals usually have control of their income levels and sources, so those who can live off their non-qualified savings are great candidates for a Roth Conversion.

With potentially $0 of income, you can convert up to your standard deduction tax-free, and you could also utilize the lowest tax rates of 10% and 12%. This tax rate should be compared to the expected tax bracket once RMDs begin at age 72, and the difference is a key benefit of performing the conversion. Performing Roth Conversions before you begin Social Security will allow you to convert savings more tax-efficiently since the lower the income, the more you can utilize the lower brackets for the conversion.


Advantages of Roth IRA Conversions


Advantages of Roth IRA Conversions

Lastly, we wanted to touch on the benefit of performing a Roth Conversion during a market downturn. Remember, taxes are applicable only on the dollar amount converted. Let’s say an investor wanted to convert $100,000 or 100 shares at $1,000 each. If this investment just fell 10%, then this conversion would only equate to $90,000. This means you could convert another $10,000 or approximately another 11 shares at $900 each. Converting 111 shares compared to 100 shares is beneficial because you convert a larger portion of your pre-tax savings. You have not triggered any additional income over your estimated $100,000, but you were able to convert more shares from the pre-tax account utilizing the lowest tax brackets.


Roth IRA Conversion – Key Takeaways

  • A Roth Conversion is defined as the process of transferring pre-tax IRA savings into an after-tax Roth IRA account.
  • This strategy is best suited for those in lower tax brackets, especially those who control their income levels and sources.
  • A Roth Conversion is more beneficial during market downturns since more shares can be converted at the same taxable income amount.


Speak With a Trusted Advisor

If you have any questions about Market Seasonality, your investment portfolio, taxes, retirement planning, our 401(k)-recommendation service, or anything else in general, please call our office at (586) 226-2100. Please also reach out if you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation.

Feel free to forward this commentary to a friend, family member, or co-worker. We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.

Best Regards,

Zachary A. Bachner, CFP®

with contributions from Robert Wink, Kenneth Wink, and James Wink

After graduating from Central Michigan University in 2017 with specialized degrees in Finance and Personal Financial Planning, Zachary Bachner set himself apart by earning the CFP® designation. Zachary now writes articles aimed at helping everyday people understand complex financial topics. He focuses on explaining financial planning concepts and strategies in clear, simple terms.