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Blog Your guide to financial planning and retirement
March 22, 2023 • 9 minutes
Tax deferred? Maybe tax free? Tax advantaged? It might sometimes feel a bit taxing to think about the tax implications of your retirement savings. But, if you want to increase your estate value or reduce your taxes, then learning about Roth conversions and what they mean for your money is worthwhile.
Roth conversions can be tremendously beneficial in the right circumstances.
Both Roth (IRAs and 401ks) and traditional retirement savings accounts (IRAs and 401ks) are tax-advantaged. Tax-advantaged means that the account is either exempt from taxation, tax-deferred, or that offers other types of tax benefits.
The main difference between a Roth account and a traditional retirement savings account is the specific tax advantages:
Another important difference between the two kinds of accounts is that Roth IRAs do not have Required Minimum Distributions (RMDs, money that you must withdraw starting at age 73).
Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.
A Roth conversion is when you take money that you have in a traditional 401k or IRA account and move it into a Roth 401k or IRA.
When you convert from a traditional IRA or 401(k) to a Roth IRA, you will need to pay taxes on the amount that you convert, as it was not previously taxed and it is counted as income.
However, once the conversion is complete, future growth and withdrawals from the Roth IRA are tax-free, provided that certain requirements are met.
The Boldin Retirement Planner enables you to model a Roth conversions to assess how the move could impact your finances, now and over your lifetime.
Within the Planner, there is also a Roth Conversion Explorer to help you determine the most advantageous time to do conversions to maximize your estate value or to minimize your lifetime tax expenditure.
Roth conversions can sometimes really save you money on taxes, but they could also cost you. It all depends on your circumstances.
While you should always consult a tax expert before doing a Roth conversion, here are 5 times when it will likely benefit you:
If you think that you will be paying higher taxes in the future, then converting to a Roth account is probably a good move. Whatever money you withdraw now will be taxed at your current rate but not at all in the future.
Tax considerations to consider might include:
In many cases, your beneficiaries will pay less in taxes if the money is in a Roth account instead of a traditional account.
If you plan to leave your retirement savings to your heirs, a Roth conversion may be a good idea. Since Roth IRA withdrawals are tax-free, your heirs won’t have to pay taxes on the money they inherit.
Another situation when a Roth conversion could reduce taxes is when you think that the money in your retirement account will likely grow significantly. If you do a Roth conversion before you see these big gains, then you will be paying taxes on a lower dollar amount and all growth in that account will be tax free.
If you are a long way off from needing to withdraw from your traditional 401k or IRA, then a Roth conversion may be a good idea.
Because Roth IRAs offer tax-free growth, they can be a good choice for long-term investments. If you have a long time horizon, such as 10 years or more, a Roth conversion may be a good idea.
Are you already 73 or older? Then you have already started taking RMDs. If not, then you will be required to withdraw money from traditional 401ks and IRAs starting at age 73 in 2023 and age 75 in 2033 due to new RMD ages. These withdrawals can be a nuisance and can bump you into a higher tax bracket.
If you don’t need the income a RMD provides, then it might make sense to convert your traditional accounts to a Roth.
There are a lot of factors that go into Roth conversions. The above rules of thumb may be directionally useful, but it is better to calculate potential conversions in light of your overall financial situation. Learn about using the Roth Conversion Explorer, part of the Boldin Retirement Planner, to model conversions against the details of your own financial situation and goals.
When you take money out of a traditional account and convert it to a Roth account, you will owe taxes on the amount you convert. You need to be sure that you can afford this expense.
NOTE: Many people convert small amounts each year to spread out the tax burden. You do not need to convert an entire account.
Usually, you can not convert a traditional 401k you have with a current employer to a Roth IRA. You must wait until you have left the employer.
When you do a Roth conversion, all of the money you convert from your traditional IRA or 401k will be taxed as income. However, it is not only the taxes that are costly, the extra income could impact other expenses:
If you withdraw money from a tax advantaged account before you are 59 1/2, then you will usually have to pay a 10% penalty in addition to the income taxes you owe.
This does not mean that you can’t convert the money, you just need to do the right kind of paperwork to transfer your funds from a traditional account to a Roth account. The process usually involves you opening a Roth account and then asking the institution where the account is held to do the paperwork involved with the conversion.
Taxes are confusing and complicated and are perhaps evolving. Before converting money to a Roth account, you may want to collaborate with a CERTIFIED FINANCIAL PLANNER™ professional from Boldin Advisors to identify and achieve your goals.
You also want to make sure that your tax strategy is part of your overall retirement plan. Boldin Retirement Planner is a rich and detailed tool that addresses many different aspects of personal finance, including taxes.
The tool enables you to try different scenarios — including modeling a Roth conversion. You will be able to immediately see your tax differences and compare cash flow, estate value and more before and after the conversion.
PlannerPlus subscribers can even use the Roth Conversion Explorer to get a personalized multi-year Roth conversion strategy to minimize taxes and maximize your estate value.
The Boldin Retirement Planner makes it easy to take control of your money to live the life you want.
Roth conversions can be a valuable strategy for building long-term, tax-free retirement income. By paying taxes now, you gain more control over your withdrawals later and potentially reduce your overall tax burden. They also offer estate planning benefits, allowing you to pass along more tax-free wealth to heirs. The key is to run the numbers, consider your current and future tax rates, and convert strategically—often in smaller amounts over time.
If you want to explore your own conversion options, the Boldin retirement planning tool includes a Roth Conversion Explorer. This feature lets you see how different conversion strategies can impact your retirement savings, taxes, and estate value.
A: It’s the process of moving money from a pre-tax retirement account, such as a traditional IRA or 401k, into a Roth account. You pay taxes on the amount converted, but future qualified withdrawals are tax-free.
A: A conversion may make sense if you expect your future tax rate to be higher, the market is down, or you have room in a lower tax bracket this year.
A: Yes. Partial conversions allow you to manage the tax impact while gradually building tax-free income.
A: Roth accounts can pass tax-free to beneficiaries if certain rules are met, potentially preserving more of your legacy.
A: Possibly. Since conversions increase your taxable income, they could affect Medicare Part B or Part D premiums. It’s wise to model the impact before moving forward.
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