Why You May NOT Want to Do a Roth Conversion?

There are plenty of articles about the many reasons you may want to consider a Roth conversion before year-end. I’ve written some in the past. But, let’s start with why you may NOT want to do one.

• Your traditional IRA is not large, and you expect to need the money for expenses during retirement.
• You plan to leave your traditional IRA to charity when you die.
• You expect your future tax rate during retirement to be less than your current tax rate.
• You do not have money in an after-tax account (such as a savings account or a taxable brokerage account) to pay the taxes on the amount you convert.
• You expect your children or grandchildren to be in a low tax bracket if they inherit your traditional IRA.
• You expect Congress to change the rules, and tax Roth IRAs in the future.
• You hate the idea of paying any income taxes sooner rather than later.

The above 7 issues are all good reasons to NOT do a Roth conversion.

So, why are so many advisors recommending you consider a Roth conversion?

There there are several compelling reasons.

• You will not need the RMDs (Required Minimum Distributions, which must be taken each year starting at age 73; with the starting age increasing to 75 in 2033) during retirement for living expenses.
• You want to leave your IRA (or a portion of it) to children or grandchildren tax-free.
• Your traditional IRA is significant, and the required RMDs will be large enough to result in higher taxes throughout retirement (this has been termed a “tax bomb”).
• Your traditional IRA RMDs will be large, and will cause your Medicare-related IRMAA (income-related monthly adjusted amount) to be higher throughout your retirement.
• You expect your tax rate to be higher during retirement than it is now.
• You have money in an after-tax account (such as a savings account or a taxable brokerage account) to pay the taxes on the amount you convert (in the same tax year as the conversion).

During my 22 years serving clients as a fee-only financial advisor I helped many clients do Roth conversions. Often, they did them over several years to minimize the taxes due each year on the conversion.

Roth conversions are complex, and you need to study the issues carefully, to see if a Roth conversion would be wise for you. To read more on the topic, you can visit my website and search for articles I wrote on 3/19/24, 10/10/23, and 2/10/23. Or, you can search online for articles on Roth conversions, and you will find many.

Some advisors say the decision on whether you should do a Roth conversion comes down to one issue – whether you expect your tax rate to be higher in retirement.

They argue that if you expect your tax rate will stay the same or go down during retirement, then a Roth conversion is not justified.

I disagree with this view.

First, we have no way of knowing what our tax rates will be in the future, and many retirees have found that social security income, pension income, and investment income pushes them into a higher tax bracket. If this is true, then adding large RMDs after age 73, will trigger even more taxable income for the rest of your life. (Roth IRAs do not have RMDs, so withdrawals are not required).

I am a huge fan of Roth IRAs because current tax laws favor Roth IRAs. Although I retired from serving clients a few years ago, my husband and I are doing large Roth conversions each year. It is important that I “practice what I preach.”

If you decide to do a Roth conversion for 2024, it must be completed by 12/31/24. You can convert any amount, so if you are “on the fence” about a $50,000 conversion, perhaps you will decide to do a $25,000 Roth conversion before year-end. Financial advisors have software programs that can help you “run the numbers,” looking at the long-term impact to help you decide whether Roth conversions would be wise for you.

Keep in mind that the biggest negative feature about doing a Roth conversion is having to pay the taxes on the amount you convert in 2024. The amount you convert will be considered as taxable income for 2024. It is best if that money is in a taxable account.

Steven Jarvis, CPA is a retirement tax specialist and a fan of Roth conversions. Recognizing we do not know what future tax rates may be, he states: “Removing tax uncertainty is an advantage in and of itself.”

The tax-free Roth IRA “bucket” provides a retiree with an additional pool to draw from during retirement if the money is needed, and leaving it to a child or grandchild tax-free makes it even more powerful.

Donna Skeels Cygan, CFP?, MBA is the author of The Joy of Financial Security, and her upcoming book Becoming Enriched. She owned a fee-only financial planning firm in Albuquerque for over 20 years before recently retiring. She welcomes emails from readers at [email protected] .