Roth conversions, as a topic, have garnered a significant amount of press in recent years. What is a Roth conversion? Is it an appropriate strategy for you?
In simplest terms, a Roth conversion is a strategy whereupon pre-tax dollars in a traditional retirement account are moved into an after-tax Roth IRA. The owner of the retirement account pays tax on the dollars that move from pre-tax to after-tax and may access those after-tax dollars tax-free after 5-years have passed.
Why would someone want to implement a Roth conversion strategy? There are a variety of reasons. In some cases, a person may have a large balance in a pre-tax account, assume tax rates in the future will be higher than they are now, and may prefer to pay those taxes now to avoid paying potentially higher taxes in the future. In other cases, a person may be concerned about the tax implications of leaving behind a pre-tax account for beneficiaries and prefer to shoulder that tax burden personally rather than leave it for their heirs. These are a couple of cases where a Roth conversion may be an appropriate strategy for helping a person reach her goals, but there are a variety of cases beyond these which may also warrant a conversation about the Roth conversion strategy.
Whether a Roth conversion strategy is appropriate for you depends on several factors including your current financial situation, tax bracket, and retirement account balances. Another factor to consider may be whether your beneficiaries are high earners who may, by inheriting a pre-tax IRA, receive a smaller financial legacy due to being in a higher tax bracket. Talk with a CERTIFIED FINANCIAL PLANNER™ to explore whether a Roth conversion strategy makes sense for you.
Wendolyn Forbes is a CERTIFIED FINANCIAL PLANNER™ with Wealth Transition Finance, A Member of Advisory Services Network, LLC. Wendolyn is a fee-only financial planner and member of the National Association of Personal Financial Advisors (NAPFA).
CFP Board owns the marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the U.S.
This material is provided as a courtesy and for educational purposes only. Advisory Services Network, LLC does not provide tax or legal advice. The information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. Consult your own legal or tax professional for information concerning your individual situation.
Originally published in the July 2024 issue of Positively Haywood.