Is a Roth IRA conversion right for you?


U.S. taxpayers are facing an inevitable increase in federal income taxes in just 26 months. With the pressing national debt, there is little optimism that the Tax Cuts and Jobs Act of 2017 will endure after 2025. When we revert to the old income tax rates in 2026, income taxes on a percentage basis are expected to rise, with increases ranging from 4 percent to 25 percent. If you believe your tax rates will be higher in retirement and beyond, it might be time to consider a partial Roth IRA conversion.

For those currently owning a traditional IRA, converting part or all of it to a Roth IRA can be a game-changer. However, it’s crucial to understand that by doing so, you’ll incur taxes for the calendar year in which the conversion occurs. If you’re nearing retirement, it’s also worth noting that it could take a decade or more to recoup the cost of this tax bill. The silver lining is that, once converted, you’ll never owe income taxes again on the Roth as it grows, and you wont be forced to take mandatory distributions as you age. From an inheritance standpoint, a Roth offers the benefit of an income tax-free inheritance for your loved ones.  

Choosing the Right Approach

When opting for a Roth conversion, it’s essential to use savings to cover the tax bill. Dipping into the IRA to pay the taxes before age 59½ will lead to a 10 percent early withdrawal penalty and, at any age, extend the time it takes for the conversion to make financial sense. Withdrawals of earnings from Roth accounts are tax-free if taken after age 59½, and the five-year holding requirement has been met. Be sure to have other funds available for use! 

For those paying Medicare premiums, remember that your premium is based on your adjusted gross income and may increase in the year after conversion. Therefore, it’s crucial to assess whether or not a Roth IRA conversion aligns with your financial goals. On the flip side, having a tax-free Roth distribution in retirement won’t affect your Medicare premiums once the initial tax hit has been absorbed. For individuals with substantial IRAs, this can lead to significant long-term savings on Medicare premiums.

Maximizing Benefits for Your Heirs

For non-spousal beneficiaries who inherit IRAs and Roth IRAs after Dec. 31, 2019, the lifetime stretch IRA was eliminated and replaced with a limited 10-year payout rule, which mandates complete liquidation within a decade following the owner’s death. (Accounts inherited before this date can still use the stretch IRA). With the 10-year rule, owning a Roth IRA can significantly benefit your loved ones. Since most heirs will likely be in their prime earning years when they inherit IRAs, they will face their highest tax brackets during this period. The Roth IRA’s tax-free nature can offer a significant advantage to these beneficiaries during this time.

Time to Act Is Now

With taxes scheduled to increase in just 26 months, assessing whether a partial or full Roth conversion aligns with your financial strategy is essential. Before proceeding with a conversion, evaluating your current income, long-term goals, and projected retirement income is vital. All of these factors need to be modeled with the assistance of a financial planner and the guidance of your trusted tax advisor. Collaboratively working with your financial team is a much wiser approach than the ready-aim-fire method. By considering a Roth IRA conversion, you can proactively navigate the impending tax changes and secure a more tax-efficient financial future. 

Eric Tashlein is a Certified Financial Planner Professional and financial advisor with Cambridge Investment Research Advisors, Inc. He can be reached at 800-878-7152. Offices: OES Wealth Partners, 71 Bradley Road Suite 4-A, Madison, CT 06443 & 30 Old King Hwy S, Darien, CT 06820. The information provided is for educational purposes only and doesn’t intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.” Advisory Services offered through Investment Advisor Representatives of Cambridge Investment Research Advisors, Inc. Cambridge Investment Research Advisors, Inc, and OES Wealth Partners are not affiliated.


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