When to Do a Roth Conversion


About the Author

dallin cutler

true Dallin Cutler, CFP®

Vice President/Partner
Salt Lake City, Utah


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Converting your traditional IRA or 401(k) to a Roth IRA allows you to enjoy tax-free withdrawals in retirement. While Required Minimum Distributions (RMDs) come into play with traditional IRAs or 401(k)s once you turn 72, that’s not the case with Roth IRAs. There are no RMDs, and any withdrawals you make are tax-free for the rest of your life.


When It Makes Sense to Do a Roth Conversion

There are three main times in which doing a Roth conversion is a good idea:

  1. At retirement
  2. When you want to take advantage of tax brackets
  3. When the market drops

The sweet spot for a Roth conversion for many clients is between the time they retire and when they start taking Social Security. That’s a window in which they have little income and the time is ripe for a Roth conversion.

Life might hand you lemons if you get laid off. But you can make some lemonade out of this experience by opting to do a Roth conversion. This is when you’re taking advantage of tax brackets because your job loss puts you in a lower bracket temporarily.

When the markets drop significantly, it takes a toll on your account balances and your emotional state. The bright side is that by doing a Roth conversion, you’re moving the discounted shares into your Roth IRA. You must pay tax on the pre-tax shares when you convert, but you're paying a lot less than if you converted before the market fell. When the market rebounds, any withdrawals are now tax-free.

Although you can do a Roth conversion at any age, keep in mind that once you are 72 or older, you must take RMDs before converting.


Roth Conversion Analysis

The right time to do a Roth conversion depends on a number of factors, which can include your current tax rate versus your protected future rate, the size of the tax bill you’ll pay for the conversion, amongst others. If your tax bracket is higher now than when you start making withdrawals, you could end up paying more in taxes due to the conversion than you would save making later tax-free withdrawals.

When a client is considering a Roth conversion, a financial planner at EP Wealth Advisors will first perform a robust analysis of the previous year’s tax return. We’ll look at all components, including federal, state, and Medicare taxes to see how they will impact the client. For instance, your income affects your Medicare premium. By converting just the right amount of pre-tax retirement funds, you can avoid paying more for Medicare.


When Not to Do a Roth Conversion

There are circumstances in which you should think twice about doing a Roth conversion. For example, if you don’t have the cash available to pay the tax bill on the conversion, you could end up paying the tax out of the converted balance. That means less money for tax-free growth.

If you need to tap your Roth IRA money within the next five years after opening the account, you could pay a penalty. The five-year rule pertaining to Roth IRAs begins as of January 1 of the year in which you made the initial contribution.

To discuss your retirement planning options and investment management strategies, contact a financial professional at EP Wealth Advisors today.





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