Trying to understand your options when it comes to retirement can feel overwhelming. And, well, frankly IT IS overwhelming.
A Roth conversion could be a strategic move to enhance your retirement planning. However, the timing of your decision to do this will greatly impact whether this strategy makes sense in your specific situation.
Here at Consolidated Planning, our approach is centered around organizing your financial world, protecting what’s most important, and focusing your resources to efficiently achieve your goals.
In this article, we’ll help you understand what a Roth conversion is, the notable benefits, and what you should consider to maximize these benefits for your retirement strategy.
What Is A Roth Conversion?
The idea of a Roth conversion is simple – transfer funds from a traditional IRA, pay taxes on them now, and move them into a Roth IRA. This move allows you to switch from tax-deferred savings to tax-free growth and withdrawals in retirement.
Benefits Of A Roth Conversion
Roth conversions offer two notable advantages for optimizing your retirement strategy:
#1 Tax Benefits
Since traditional IRA contributions are pre-tax, converting to a Roth IRA means you’ll owe income taxes on the amount converted in the year of the conversion. Paying taxes earlier than required may benefit you if you anticipate being in a higher tax bracket or experiencing a lower-than-typical income year.
#2 Managing Required Minimum Distributions
Under the current law, the IRS mandates withdrawals from traditional IRAs. Unlike traditional IRAs, Roth IRAs do not have Required Minimum Distributions (RMDs) during your lifetime. By converting some of your funds to a Roth IRA, you can reduce your traditional IRA’s balance, lowering the amount required for annual withdrawals later in retirement.
4 Factors To Consider For A Roth Conversion
Now, we know that sounds great but before deciding on a Roth conversion, there are several key factors you will want to evaluate.
#1 Current and Future Tax Rates
Comparing your current tax rate with your expected future tax rate in retirement is important for optimizing your retirement strategy. How can you know where you want to be if you can’t fully understand where you are?
For those of you who wish to be in a higher tax situation later, converting now could allow you to pay taxes at today’s lower rates. Sounds advantageous, doesn’t it?
#2 Impact on Your Financial Situation
Your financial stability is of utmost importance. Any time you convert funds, no matter which vehicle you’re doing so, you will trigger a taxable event.
In the instance of a taxable event, you need to ensure that you have adequate resources to cover the taxes without impacting your financial stability.
#3 Long-Term Growth Potential
A significant benefit of a Roth IRA is the potential for tax-free growth on your investments. If you anticipate substantial growth in your retirement accounts, converting now can help you capitalize on this growth without future tax burdens. This strategy works best if the taxes due are paid from other outside assets and not withheld from the converted amount.
#4 Retirement Planning Objectives
Ultimately, your decision to convert to a Roth depends on how well it aligns (or not) with your retirement strategy. A Roth IRA can offer you more flexibility, help reduce retirement tax liability, and be left to heirs more efficiently than a traditional IRA.
Maximize The Benefits Of A Roth Conversion For Your Retirement
Although Roth conversions have clear benefits, they require careful planning to fully take advantage of them, especially as you approach retirement. Understanding your current tax situation and future needs is essential to making a well-informed decision.
If you think a Roth conversion might be right for your retirement strategy, here are some items to keep in mind:
- The timing of your conversions where your income is lower than usual to take advantage of lower tax rates
- A charitable intent allows you to consolidate donations into one year to reduce your taxable income
- If the value of your IRA investments declines due to a market downturn, you may be able to convert more while prices are low, resulting in less tax
To better navigate the complexities of converting your funds to a Roth, discuss the options for optimizing your retirement strategy with a financial professional at Consolidated Planning.
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Exp. 3/2027
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of James M. Matthews and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
