BY: Mindy S. Hirt, CFP®
Senior Vice President, Wealth Advisor
Deciding whether to do a Roth IRA conversion depends on several factors. What may make sense for your friend may not be right for you. Here are a few considerations to help you determine whether to Roth or not:
1| Current Tax Bracket vs. Future Tax Bracket
A Roth IRA conversion involves paying taxes now on your traditional IRA or 401(k) funds and then moving that money into a Roth IRA. The big advantage of a Roth IRA is that it grows tax-free—and withdrawals in retirement are also tax-free.
- If you think your tax rate is lower now than it will be in retirement, a Roth conversion can be a smart move. You’ll pay taxes on the conversion at today’s lower rate and enjoy tax-free withdrawals later. Examples of when this might be the case include:
- Someone who has lost a spouse in the current year and will be in a higher bracket in the future, with similar income but as a single taxpayer.
- An individual who projects higher income from required minimum distributions and/or capital gain transactions in the future.
- If you think your personal tax rate will be higher in retirement—or simply that tax rates will increase across the board—it might make sense to convert now and lock in a lower tax rate.
2| Timing of the Conversion
- Converting in a low-income year (for example, if you’re temporarily unemployed or in retirement before you start taking Social Security or other income) could be beneficial. You could pay lower taxes on the conversion in that year.
- Keep in mind: the conversion amount counts as income for the year. If it pushes you into a higher tax bracket, it may end up costing more than expected. Ideally, you’ll want to have money outside your retirement accounts to pay the taxes due, for maximum long-term benefit.
- Converting after a market pullback may provide the benefit of greater appreciation post-conversion.
3| Your Age
- If you’re young, you have more time for the Roth IRA to grow. The longer your money stays in the Roth IRA, the more tax-free growth you can potentially accumulate.
- If you’re closer to retirement, the tax benefits of a Roth IRA are still significant, but you may have less time to make up for the taxes paid on the conversion.
4| Estate Planning
- A Roth IRA can be a great tool for passing wealth to heirs, because they can inherit it and take tax-free withdrawals.
- If you plan on leaving the bulk of your retirement accounts to heirs who are likely to be in a higher tax bracket and/or live in a state with higher taxes, a Roth IRA can be very effective for multi-generational planning.
- For those who have a taxable estate and don’t plan to use their IRA for charitable giving, converting to a Roth and paying the tax now can be a smart way to reduce your estate and leave more to your heirs.
5| State Taxes
- Don’t forget about your state tax Some states may impose higher taxes on Roth IRA conversions, which could affect the overall benefit. State-specific examples where conversions may make sense include:
- An IRA owner currently living in a state without income tax who plans to move to a state with income tax the following year.
- An older IRA owner whose children are likely to inherit the bulk of the IRA, are in high tax brackets, and live in states with income tax.
6| Charitable Planning
- While many of the examples above focus on reasons to consider a conversion, one compelling reason not to convert is if you plan to use your IRA for charitable gifts. This can be done:
- During your lifetime (in 2025, up to $108,000 per year for individuals age 70½ or older can be distributed directly to charity tax-free).
- After death, by naming charities as beneficiaries of your IRA.
- Using your IRA for charitable planning can be an extremely tax-efficient strategy for those who are charitably inclined.
7| Micro-conversions
- Just like doing a Roth conversion is not for everyone, doing a full conversion in one taxable year may not be advisable. This strategy includes:
- Converting smaller amounts over longer periods.
- Limiting annual conversions to a level of income based on your current tax rate.
Conclusion:
There is no one-size-fits-all answer when it comes to converting your IRA to a Roth. Each situation is unique and requires predictions not only for your future—but also that of your heirs—before making a decision. The professionals at Argent are here to help you evaluate your particular circumstances to determine what might be best for you.
