Is a Roth Conversion Right For You?

December 14, 2022

What is a Roth Conversion?

Roth conversions are a strategy that allows savers to decrease their tax burden in retirement. A Roth conversion is when an investor converts a traditional retirement account into a Roth retirement account. Traditional and Roth are terms the IRS uses to distinguish tax status for retirement accounts.


Why do this ?

The primary advantage of converting traditional retirement accounts to Roth accounts is you create longevity and reduce the future tax burden.

If you have accumulated a healthy nest egg in a traditional retirement account, when retirement comes distributions from the account will be taxed at whatever tax rate you happen to be in at that time. With a ROTH, distributions after age 59 ½ are tax-free. If you are tired of paying taxes and want to put some of your taxes behind you, this can be a huge benefit.

Required Minimum Distributions (RMDs) begin at age 72 for all traditional retirement accounts.

As their name suggests, they are required distributions that must be taken annually. Roth IRAs are not subject to RMDs. Additionally, as long as you earn income you can contribute to a Roth IRA after age 72. Having a Roth account in your financial plan creates more longevity.

Roth Conversions allow people to create a tax-free bucket of money. Whether it is for something fun in retirement like traveling or spending time with loved ones or something not so fun, like paying for long-term care. Either way, if $100,000 is pulled from a Traditional IRA or 401k that is going to cause your tax-rate to spike. By executing Roth conversions you can prepare for expected and unexpected events.

What are the conversion rules?

If you are an individual with a modified adjusted gross income (MAGI) over $214,000 or a married couple filing jointly with a MAGI over $144,000 you are unable to contribute to a Roth IRA. However you are able to convert Traditional accounts to Roth accounts.

The assets coming from the traditional retirement account will be subject to regular income tax in the year the conversion occurs. This requires cash-flow planning and liquidity to pay the taxes.

Why are we talking to our clients about this?

2022 has been a historically bad year for captial markets. Stocks are down, bonds are down, in fact there are very few parts of the market that went up in 2022! Markets are very sensitive to news about inflation, Central Bank action, the war in Ukraine and China’s Zero Covid policy. Volatile markets create opportunities to convert depreciated assets since the taxes due are less than on appreciated assets.

In addition to market decline, Roth conversions are attractive now if you are someone who believes tax rates will increase in the future. The country’s budget deficit climbs higher every year. Social Security and other entitlements are already underfunded and growing. Many state’s pension plans are underfunded and it is getting more competitive for states to attract businesses to pay taxes and support these shortfalls. While we don’t know when taxes will increase, we do believe the current tax rates are likely lower than future tax rates. This makes doing a Roth conversion now more attractive than not doing one or waiting to do one later.

Is a Roth Conversion Right For You?

We are firm believers in the benefits of moving to Roth accounts. However, Roth conversions are a complex maneuver. With variables constantly changing such as income, tax rates and personal liquidity. If you are considering a partial or full conversion of a traditional retirement account, we recommend you speak with a trusted advisor. At Pleasant Street Wealth Advisors our integrated Financial Planning team has the knowledge and experience to guide you through all of your options.

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