When planning for retirement, it's easy to focus on how much you've saved. But another question deserves attention: How much of that money will you actually keep after taxes?
For many Americans, a significant portion of retirement savings is held in traditional IRAs and 401(k)s. These accounts can provide tax-deferred growth, but tax-deferred does not mean tax-free. Eventually, withdrawals are generally taxed as ordinary income.
Today's Tax Rates Are Known. Tomorrow's Aren't.
We know what federal tax rates are today, but no one can say with certainty what tax rates will look like 10, 20, or 30 years from now.That uncertainty is one reason some retirees consider whether a Roth conversion could fit into their retirement strategy.
How Does a Roth Conversion Work?
A Roth conversion moves money from a traditional IRA into a Roth IRA. You generally pay ordinary income tax on the taxable amount converted in the year of the conversion. In exchange, qualified Roth withdrawals can potentially be income-tax-free later, assuming applicable requirements are met.
The basic idea is simple: pay taxes on some money today at a rate you can see, rather than leaving the future tax rate entirely unknown.
You Don't Have to Convert Everything
A Roth conversion doesn't necessarily mean converting an entire retirement account at once. Some people may consider converting portions of their traditional IRA over several years. The amount to convert can depend on current income, tax brackets, projected required minimum distributions, Medicare considerations, and other parts of the retirement plan. The goal isn't simply to convert as much as possible. It's to determine whether a particular conversion amount makes sense for your circumstances.
Consider the Bigger Picture
A Roth conversion can affect more than your income-tax bill.
Increasing taxable income may affect your tax bracket, the taxation of Social Security benefits, and Medicare premiums. That's why conversion planning should consider your overall retirement income strategy rather than looking at the conversion by itself.
Ask a Better Question
Instead of simply asking: “Should I convert my IRA?”
A better question may be: “How much should I convert each year, and at what tax rate?”
The answer could be different for every retiree. For some people, a Roth conversion may make sense. For others, converting may not be appropriate.
The important thing is to understand the potential tax consequences and evaluate the decision as part of your broader retirement plan.
Important Disclosure: This material is provided for educational purposes only and is not intended as individualized tax, legal, or investment advice. Roth conversions may increase taxable income and can affect Medicare premiums and other tax-related items. Roth conversions are generally irrevocable. Tax laws can change. Consult a qualified tax professional regarding your specific circumstances before completing a Roth conversion.
This content is for educational purposes only and is not individualized financial advice.
