Is a Roth Conversion Right for You?

Introduction 

Roth conversions have gained attention as a strategy to reduce taxes in retirement, but they are not a universal solution. While a Roth conversion can be a powerful planning tool, the benefits depend heavily on an individual’s tax situation, retirement timeline, and long-term goals. 

When implemented thoughtfully, Roth conversions can help reduce future taxable income, improve retirement flexibility, and create potential estate planning advantages. However, they also require paying taxes upfront, which may not make sense in every situation. 

What Is a Roth Conversion? 

To understand Roth conversions, it is helpful to first understand how retirement accounts are taxed. 

• Traditional IRA and Pre-Tax Retirement Accounts 
  
  With pre-tax retirement accounts, such as Traditional IRAs or pre-tax 401(k)s, contributions are generally tax-deductible in the year they are made. Investments then grow tax-deferred, meaning no taxes are paid on gains or income while the funds remain in the account. 
  
  Withdrawals are taxed as ordinary income in retirement. Additionally, account owners must begin taking Required Minimum Distributions (RMDs) beginning at age 73 or 75, depending on year of birth.
   
• Roth IRA Accounts 
  
  Roth IRAs work differently. Contributions are made with after-tax dollars, so there is no upfront tax deduction. However, investments still grow tax-deferred, and qualified withdrawals are tax-free. 
  
  Unlike Traditional IRAs, Roth IRAs are not subject to RMDs during the owner’s lifetime. 

How a Roth Conversion Works 

A Roth conversion involves transferring assets from a Traditional IRA or other pre-tax retirement account into a Roth IRA. The amount converted is treated as taxable income in the year of the conversion. 

Once assets are inside the Roth IRA, future qualified withdrawals are tax-free. 

It is important to understand two key rules: 

• Each Roth conversion has its own 5-year holding period before converted funds can be withdrawn penalty-free. 
• Individuals must generally be age 59½ or older to avoid the 10% early withdrawal penalty on converted amounts. 

The primary goal of a Roth conversion is to pay taxes at a lower rate today in exchange for potentially reducing taxes later in retirement. 

Potential Benefits of Roth Conversions 

Lower Lifetime Taxes 

For some retirees, strategically converting portions of a Traditional IRA during lower-income years can reduce future taxable income and lower overall lifetime taxes. 

This strategy is especially valuable for individuals who expect: 

• Higher future tax rates 
• Large future RMDs 
• Significant retirement account growth over time 

Greater Retirement Flexibility 

Because Roth IRA withdrawals are generally tax-free, Roth assets can provide additional flexibility when managing retirement income, Medicare premiums, and tax brackets. 

Estate Planning Advantages 

The SECURE Act changed inherited IRA rules for many beneficiaries. Most non-spouse beneficiaries must now fully distribute inherited IRAs within 10 years. 

For inherited Traditional IRAs, those distributions are generally taxable as ordinary income. Inherited Roth IRAs are also subject to the 10-year rule, but qualified withdrawals remain tax-free. 

As a result, Roth conversions can potentially reduce the future tax burden on heirs. 

When a Roth Conversion May Make Sense 

While every situation is different, Roth conversions may be beneficial for individuals with the following characteristics: 

Significant IRA Balances 

• Individuals with large pre-tax retirement balances who may not need their full RMDs for living expenses are often strong candidates for Roth conversion planning. 

Ability to Pay Taxes 

• Using cash or taxable brokerage assets to pay the conversion tax is generally more advantageous than using IRA assets themselves. 

Lower-Income Years 

• Timing matters. Roth conversions are often most effective during years when taxable income is temporarily lower, such as: 

• Early retirement before Social Security begins 
• Before RMDs start 
• Between jobs 
• Years with lower business income 

Careful tax bracket management is essential. 

Long Time Horizon 

• The longer assets remain invested in the Roth IRA, the greater the potential benefit of future tax-free growth.  

Legacy Planning Goals 

• For individuals focused on leaving assets to heirs, Roth conversions may help reduce the tax burden beneficiaries face on inherited retirement accounts. 

When a Roth Conversion May Not Make Sense 

Despite the potential benefits, Roth conversions are not always advantageous. 

High Current Tax Bracket 

Converting assets while in a very high tax bracket may reduce or eliminate the long-term benefit of the strategy, especially if future tax rates are expected to be lower. 

Conversions can also increase: 

• Medicare IRMAA surcharges 
• Taxation of Social Security benefits 
• Phaseouts of deductions or credits 

Need for Near-Term IRA Withdrawals 

Because converted funds are subject to the 5-year rule, Roth conversions may be less attractive for individuals who expect to need access to retirement assets in the near term. 

Cash flow planning and withdrawal strategy should always be considered before implementing conversions. 

Roth Conversion Strategies 

Even when a Roth conversion makes sense, execution matters. 

Partial Roth Conversions Over Multiple Years 

Many individuals benefit from converting smaller amounts over several years rather than converting an entire IRA balance at once. This approach can help manage tax brackets and reduce the overall tax impact. 

Converting Before RMD Age 

Starting conversions earlier provides more flexibility and more years to gradually reduce pre-tax balances before RMDs begin. 

Taking Advantage of Market Declines 

Market volatility can create opportunities for Roth conversions. Converting investments when account values are temporarily lower allows more shares to move into the Roth account at a reduced tax cost. 

Conclusion 

Roth conversions can be a valuable long-term tax planning strategy when implemented thoughtfully and coordinated within a broader financial plan. 

However, this is not a one-size-fits-all solution. The effectiveness of a Roth conversion depends on factors such as current and future tax rates, retirement income needs, time horizon, and estate planning goals. 

Careful planning and coordination with both a tax advisor and wealth consultant are essential to determine whether a Roth conversion aligns with your overall financial strategy. If you are curious if a Roth conversion makes sense for your financial plan, please reach out to your wealth consultant, or take our client compatibility survey to learn more about working with Evergreen.  

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The information provided is general in nature and should not be considered legal or tax advice. Consult an attorney, tax professional, or other advisor regarding your specific legal or tax situation. The items included in this publication are our opinion as of the date of this piece, not all encompassing, and are subject to change without notice. This material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Any tax or legal advice contained in this communication is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.