As you approach retirement, you’re likely thinking about how to make the most of your hard-earned savings. One strategy that could be considered is a Roth conversion. I have found this can potentially help lower taxes in the later years of retirement for specific client situations.
Today, we will explore some of the potential benefits of doing a Roth conversion in retirement and how it can help you achieve your long-term financial goals.
What is a Roth Conversion?
A Roth conversion is a process where you convert a portion of your traditional IRA or 401(k) savings to a Roth IRA. This means that the converted funds are taxed in the current year, but they grow tax-free and are tax-free in retirement as long as the 5-year rule is followed as discussed below.
The key benefit of a Roth conversion is that it allows you to pay taxes on the converted funds now, rather than later, when you could be in a higher tax bracket.
Benefits of Roth Conversions in Retirement
Tax-Free Income in Retirement: With a Roth conversion, you can enjoy tax-free income in retirement, which can be a significant advantage. Since the funds are already taxed, you won’t have to pay taxes on the withdrawals, which can help you stretch your retirement savings further.
You must have completed the Roth IRA conversion for 5 years to get access to your conversion tax free, otherwise, only the amount converted will be tax free. Please consult a tax advisor around your specific situation to make sure this is done correctly.
Increased Flexibility: Roth conversions give you more flexibility in retirement. You can use the converted funds to supplement your income, cover unexpected expenses, or pursue your passions without worrying about taxes as long as the 5-year rule has passed.
Reduced Tax Bracket: By converting a portion of your traditional IRA or 401(k) to a Roth IRA, you can reduce your taxable income in retirement, which can help you stay in a lower tax bracket and help reduce your income when you have to start your required minimum distributions.
No Required Minimum Distributions (RMDs): With a Roth IRA, you’re not required to take RMDs on your Roth IRA, which means you can keep the funds in the account for as long as you want without having to take withdrawals.
Inheritance Benefits: Roth IRAs are generally more inheritance-friendly than traditional IRAs. Your beneficiaries can inherit the funds tax-free, which can be a significant advantage.
Other Items to Keep in Mind
Consider the Impact on Your Tax Bracket: Before doing a Roth conversion, you should consider the impact on your tax bracket. You may want to convert a portion of your traditional IRA or 401(k) to a Roth IRA, which can help you reduce your taxable income and stay in a lower tax bracket.
Keep in Mind the 5-Year Rule: With a Roth IRA, you must wait at least five years from the date of the conversion to withdraw the funds tax-free. You should keep this in mind when planning your Roth conversion.
Roth Conversion Timing: You should consider the timing of your Roth conversion. You may want to convert funds in a year when you’re in a lower tax bracket or if you think your tax bracket will increase in the future.
Consult with a Financial Advisor and Tax Advisor: Before doing a Roth conversion, it’s essential to consult with a financial advisor and tax advisor. They can help you determine the best strategy for your individual situation and ensure that you’re making the most of your retirement savings. I have put together some things to considered when selecting an advisor and you can read it here.
Conclusion
A Roth conversion in retirement can be a helpful strategy for achieving your long-term financial goals. By converting a portion of your traditional IRA or 401(k) to a Roth IRA, you may enjoy tax-free income in retirement, increase your flexibility, and reduce your lifetime taxes. If you’re retired or approaching retirement, it could be valuable to consider a Roth conversion as part of your overall retirement strategy.
Tax Disclaimer
This article is for informational purposes only and is not intended to provide specific financial or tax advice. You should consult with a financial advisor and tax professional to determine the best strategy for your individual situation.
