Roth conversions may help reduce future taxes and shape legacy plans, but timing can be important. See the various factors that can affect whether the move is beneficial.

Is a Roth Conversion the Right Move for Your Tax Strategy?

For high-net-worth individuals, a Roth conversion can present opportunities to adjust tax exposure, manage retirement distributions, and plan for wealth transfer. At its core, a Roth conversion involves moving assets from a pre-tax retirement account, such as a Traditional IRA or 401(k), into a Roth account. The tradeoff is that the amount converted is taxable in the year of the transaction.

Potential benefits of Roth conversions may include:

• Shifting assets into a tax-free growth environment
• Reducing future required minimum distributions (RMDs)
• Managing exposure to future tax brackets and Medicare surcharges
• Supporting legacy and estate planning goals

Whether a Roth conversion makes sense often comes down to timing and personal circumstances. Key considerations could include your current and projected income levels, how Medicare costs may be affected, whether you have liquid assets available to cover the tax bill, and how charitable giving or estate plans factor into the bigger picture.

With so many moving parts, it’s best to weigh the decision alongside professionals, including both a financial advisor and a tax advisor, who can help you evaluate the tradeoffs. 

How a Roth Conversion Works

When you convert pre-tax retirement savings into a Roth account, the converted funds are treated as ordinary income in that year. Unlike Roth contributions, there are no income limits for conversions. Reporting is handled on IRS Form 8606, with rules like the pro-rata calculation applying if you hold both pre-tax and after-tax dollars in your accounts.

Two additional rules are important:

• The five-year rule: Each conversion carries its own five-year clock for penalty-free withdrawals if you are under 59½.
• Required minimum distributions (RMDs): Roth IRAs never require distributions for the original account owner, and as of 2024, Roth 401(k) and 403(b) accounts are exempt as well.

When a Roth Conversion May Align with Your Tax Strategy

Depending on your income, retirement timeline, and estate priorities, a Roth conversion may be worth considering in the following cases:

• Taking advantage of lower tax years. Converting in a year when your marginal tax rate is relatively low may potentially reduce exposure to higher brackets later in life.
• Pre-RMD years. Retirees who have not yet begun Social Security or RMDs may use this window to convert strategically, smoothing taxable income over time.
• Managing Medicare costs. Because Medicare premiums are tied to income (IRMAA), conversions done before enrollment or carefully planned within income thresholds may help limit future surcharges.
• Estate considerations. Roth IRAs are not subject to RMDs during the owner's lifetime, meaning assets could potentially grow over a longer period of time, and beneficiaries generally inherit assets that may be distributed tax-free within 10 years.
• Liquidity to cover taxes. Paying the tax bill from non-retirement funds allows more converted dollars to grow in the Roth environment.

Checklist for Considering a Roth Conversion 

When a Roth Conversion May Be Less Advantageous

There are also circumstances where converting may increase costs or limit flexibility:

• Pushing into higher tax brackets or Medicare surcharges. Conversions that significantly raise taxable income can result in higher liabilities.
• Charitable giving plans. If you intend to make Qualified Charitable Distributions (QCDs) from IRAs after age 70½, keeping those assets in pre-tax accounts may be more efficient.
• Insufficient cash to pay the taxes. Using IRA assets to cover the tax bill could potentially reduce the Roth’s future growth potential.
• Accessing funds before age 59½. Conversions are subject to the five-year penalty rule if withdrawn too soon.

Factors to Consider Before Deciding on a Roth Conversion

Evaluating whether a Roth conversion fits your tax strategy requires careful modeling:

• Project your future tax brackets and RMDs compared to your current rate.
• Consider Medicare IRMAA thresholds, which are based on income with a two-year look-back.
• Account for other tax variables such as deductions, phase-outs, and state residency changes.
• Align the decision with estate goals, particularly whether heirs are in higher or lower tax brackets than you.

Implementation Approaches

If a Roth conversion appears beneficial, some approaches can help manage the process:

• Partial conversions. Converting gradually up to a target tax bracket or income threshold each year.
• Employer plan coordination. Using IRS guidance (Notice 2014-54) to separate after-tax contributions into Roth accounts when rolling over employer plans.
• Tracking rules and timelines. Each conversion carries its own five-year rule, and accurate records are critical.
• Annual review. Laws, tax rates, and Medicare brackets change, making it important to revisit the strategy regularly.

How an Advisor Can Support This Decision

Deciding whether a Roth conversion fits your financial strategy requires looking beyond the tax year at hand. An advisor can help you:

• Model how conversions interact with future RMDs, Medicare costs, and estate goals
• Coordinate with tax professionals to understand the short- and long-term implications
• Revisit the plan each year as income, tax laws, and personal goals evolve

Because conversions involve complex interactions among tax law, retirement planning, and wealth transfer, working with a financial advisor and tax professional is often the most effective way to evaluate whether this strategy is right for your circumstances. Contact an advisor near you to learn more.

DISCLOSURES

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