There’s no better time than now to explore the potential benefits of converting your retirement savings account to a Roth IRA. Here are five considerations that will help you determine if such a conversion could benefit you and your loved ones, both now and down the line. 

1. Plan according to the current market
Are you considering a Roth IRA conversion? If so, your timing can significantly reduce the tax bite. With a highly volatile stock market and lower major market indexes, it might be time to take advantage of a down market by converting now. Whether the stock market is bad or your income is down this year, there could be a silver lining.  A lower-than-usual income can help lessen the tax hit of a Roth IRA conversion. If the pandemic took a toll on your paycheck, or you own a business that operated at a loss, you could convert funds to a Roth IRA with less tax impact than in more profitable years. And in the current down market environment, the amount converted will grow tax-free inside of your Roth IRA now, and once the markets turn around. 

2. Take advantage of lower Required Minimum Distributions (RMDs)
An RMD is an IRS-mandated amount of money that you must withdraw from pre-tax retirement accounts after you turn 72. As you get older, RMDs typically increase and can become larger than you need to support your retirement expenses — forcing you to be taxed on income that may not even be needed and that could push you into a higher marginal tax bracket.

 

One of the major advantages of a Roth IRA is that there are no RMDs – you’ve already paid the taxes. Plus, converting pre-tax retirement funds to a Roth IRA account will decrease the balance of funds remaining in the pre-tax retirement account resulting in smaller RMD requirements in the future.

3. Be mindful of future tax rates and your future tax situation
It’s essential to consider future tax rates as well as your projected tax situation down the line. By converting now, you will be locking in today’s low tax rates which are lower than previous tax rates and will almost definitely be lower than future tax rates. Whatever money you convert to a Roth now will be taxed at your current rate and will not be taxed at all in the future. 

It’s also important to think about your future income. There may have been a time when your decision to invest in a traditional IRA assumed you’d be in a lower tax bracket once you retired. However, between social security, pensions, investment income, and RMDs, those who are retired may find themselves in a higher tax bracket. Converting a higher portion of your traditional IRA now can serve to reduce the level of future RMDs. If you don’t need the money from the RMDs on the traditional IRA, then paying the taxes now in exchange for the ability to allow the converted Roth funds to continue to grow tax-free could be a sound decision. 

4. Plan according to current policies
To expand upon the previous point, when individuals will be at their lowest marginal tax rate depends upon the prevailing tax policy and personal income level in any given year.  Today’s current tax policy set under the Tax-Cut and Jobs Act is advantageous to taxpayers. The current rate policy is set to expire at the end of 2025, after which marginal rates and income brackets revert to their previous higher levels. 

Holding all else equal, people will be in a lower marginal tax rate environment now than they will be in 2026.  

In addition, the “Build Back Better” legislation proposed by the Biden Administration threatens to restrict the ability of savvy investors to convert their IRA to a Roth. Whether all, part, or none of “Build Back Better” is adopted, the higher national deficits and debt levels will make raising taxes on retirement withdrawals tempting to any government in need of more funds.

5. Protect and grow your investments
The longer you hold investments in pre-tax retirement accounts, the larger those balances will grow. Eventually, the entire balance will have to be realized as income, and taxes will have to be paid. By not converting funds to a Roth IRA, you are essentially choosing to pay income tax on the current value of your pre-retirement account balance plus all the future capital growth the investments experience. 

By converting to a Roth IRA, you only pay income taxes once on the current balance being converted in any given year. Once that balance is converted and reinvested, the capital growth from those investments is never again taxed.   

 

Grow your wealth by connecting with the experts at Roth Right. We will expertly guide you through the conversion process – saving you up to 40% of the taxes that you are required to pay on the conversion with our trusted comprehensive tax strategies – increasing your net worth with specific investment strategies.