Having a portion of your investments in a Roth IRA or Roth 401k gives you a lot of flexibility for future cash needs, plus you never pay taxes on the growth or distributions ever again! As an added bonus, your heirs could also save on taxes.
Roth conversions can be a wonderful thing. But keep in mind, you pay income taxes on the entire amount of the conversion, and there are a lot of factors that come into play to see if it makes sense for you. Roth conversion considerations are very individualized, and we can help you evaluate:
- When would be a good time to convert? Typically the best years are when your income is lower but before RMDs are required. And we can choose specific IRA investment holdings that we feel are temporarily ‘down’ in value.
- What amount should you convert? It’s always nice if you can ‘fill up’ a lower tax bracket, but watch out for Medicare surcharges and changes to your social security taxable percentage. You also need to be careful about increasing your income if you have health insurance subsidies.
- Do you have sufficient funds to pay the income tax on the conversion amount? Most people want to not withhold taxes on the conversion, and to pay for the taxes with outside savings.
Ask your advisor if a Roth conversion is right for you, and note that we always encourage you to run our suggestions by your CPA or tax preparer.