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Thinking about taxes in retirement? You’re not alone.
As retirement gets closer, many people start wondering how to keep more of their money—and less in Uncle Sam’s pocket. One strategy that often pops up is the Roth conversion. It sounds simple: move money from a traditional IRA or 401(k) into a Roth IRA, pay taxes now, and enjoy tax-free withdrawals later.
But like most things in financial planning, the details matter. Let’s break down when a Roth conversion might make sense—and when it could backfire.
1. Timing Is Everything
Imagine you’re filling a bucket with water. If you pour too fast, it overflows. That’s kind of what happens with Roth conversions and your tax bracket.
When you convert, the amount counts as income for the year. If you’re still working or already earning a solid retirement income, converting a large chunk could push you into a higher tax bracket—meaning a bigger tax bill than expected.
On the flip side, if you’re in a lower-income year (say, early retirement before Social Security or required minimum distributions kick in), you might be able to convert at a lower tax rate. That’s where strategic timing can really pay off.
2. Tax-Free Growth Could Be a Game-Changer
One of the biggest perks of a Roth IRA? No taxes on qualified withdrawals. That’s a huge win if you expect your tax rate to rise in the future or want more control over your income in retirement.
Plus, Roth IRAs don’t have required minimum distributions (RMDs), so your money can keep growing tax-free for as long as you want. That flexibility can help you manage taxes year-to-year and even leave behind a more efficient legacy for your family.
3. How You Pay the Taxes Matters
Here’s a common mistake: using IRA funds to pay the taxes on a Roth conversion. It might seem convenient, but it can shrink the amount that gets to grow tax-free—and if you’re under 59½, it could trigger penalties.
Ideally, you’d use cash from outside your IRA to cover the tax bill. That way, the full converted amount stays in the Roth, working for you long-term.
4. Watch Out for Medicare Surprises
This one catches a lot of folks off guard: Roth conversions can affect your Medicare premiums.
Medicare Part B and D costs are based on your income. A big conversion could bump you into a higher premium tier for a year or two. It’s not a dealbreaker, but it’s worth factoring into your decision—especially if you’re doing a large conversion.
5. Thinking Beyond Your Lifetime
If you’re planning to leave money to your kids or grandkids, Roth IRAs can be a powerful tool. They’re not subject to RMDs during your lifetime, and heirs generally get to take tax-free withdrawals over 10 years.
This can be especially helpful if your heirs are in higher tax brackets. It’s a way to pass on wealth without passing on a tax headache.
Final Thought: It’s Not One-Size-Fits-All
Roth conversions may be beneficial in certain circumstances—but they’re not always the right move. It depends on your income, your retirement timeline, your cash flow, and your goals for the future.
If you’re curious whether a Roth conversion fits into your plan, it’s worth having a conversation with your advisor. With the right strategy, you could potentially turn a tax decision into a long-term advantage—and feel more confident about your retirement.
Need Help?
Whether you’re ready to get started today or you’re just exploring your options, talk to an advisor to discuss your next steps.
Disclaimer
This content is for informational purposes only and does not constitute financial, tax, or legal advice. Roth conversions involve complex considerations and may not be suitable for everyone. Individual circumstances—including income level, retirement timeline, tax bracket, and estate planning goals—can significantly impact the benefits and drawbacks of a conversion. Before making any decisions, consult with a qualified financial advisor or tax professional to evaluate how a Roth conversion fits into your overall retirement strategy.
Strategic Financial Services, Inc. does not provide legal or tax advice. This material is for informational purposes only and should not be relied upon as a substitute for personalized professional advice.
