Roth IRA Conversion

It’s a Great Time to Consider Roth Conversions

With the end of 2021 approaching, and with historically low tax rates likely to increase, now is an excellent time to consider a Roth conversion.  However, the rules can be complex, so it is important to check out all the angles before acting. 

What is a Roth Conversion?

A Roth conversion occurs when an individual moves (“converts”) money from a tax-deferred Traditional IRA into a tax-free Roth IRA. As a reminder, a traditional IRA, as a tax-deferred account, must ultimately distribute and pay tax on its assets. A Roth, however, is funded with after-tax money. It is tax-free and has no distribution requirement.

By converting IRA assets to Roth IRA assets, you will have to pay tax on the amount of the conversion in the year of the conversion. Once the assets are in a Roth IRA, however, they can grow tax-free forever (at least that’s the rule for now).  With a traditional IRA, owners are forced to begin taking taxable distributions once they turn 72.  Roth IRAs simply offer more flexibility.

Four Signs That You Should Consider a Roth Conversion

  1. You expect your tax rate to be the same or higher in the future.  Converting IRA assets to a Roth now could be a good move if you expect to have a higher tax rate later in life.

  2. You are retired but are delaying Social Security.  If you find yourself in a lower tax bracket because you are no longer working but have yet to start taking Social Security, it may make sense to do a Roth conversion to take advantage of your temporarily lower tax bracket.

  3. You had lower income in 2021.  If your income for the year is down, for whatever reason, a Roth conversion may be a tax-friendly way to get more money in your Roth.

  4. You plan to make a sizeable charitable donation. The deduction you receive from a charitable donation can help to offset the tax liability of a Roth conversion.

Consider Your Overall Financial Situation First

While Roth conversions make sense for many people, they do not make sense in every circumstance.  Each person must consider their own specific financial circumstances to figure out if a Roth conversion is desirable. For example, because a Roth conversion increases your taxable income that year, it may push you into a higher tax bracket or affect things like Medicare Part B surcharges.  

As always, when it comes to making financial moves, what’s right for one person’s situation may not be right for someone else.  Please contact us if you would like to discuss Roth conversions or other financial strategies with us.

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Peter Thoms, CFA, MBA

Peter Thoms, CFA, MBA

Peter Thoms, CFA, founded Orion Capital Management LLC in April 2002. Peter has extensive experience managing investment portfolios for clients pursuing a wide range of financial goals.

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