Is This the Year to Do a Roth Conversion?

With three months left in the year, you still have enough time to evaluate whether a Roth conversion makes sense before December 31. There are a few important factors to consider before making a decision.

At a Glance

• Some years are better than others for a Roth conversion. Your current income picture is the most important factor.

• A Roth conversion creates a tax bill now in exchange for tax-free growth and withdrawals later. 

• Q4 is the right time to evaluate your options because your annual income picture is finally clear enough to model accurately.

What Is a Roth Conversion?

A Roth conversion is the process of moving money from a pre-tax retirement account (such as a traditional IRA or 401k) into a Roth IRA. Contributions to Roth IRAs are made post-tax, but that money will grow tax-free, and when you withdraw you won’t pay taxes on it again. If you expect to be in a higher tax bracket in retirement, a conversion could make sense.

To minimize your tax impact today, however, you’ll need to be strategic about the timing of your conversion. The amount you convert is added to your taxable income for the year, which means you’ll pay today’s tax rate on it. Converting in a year when your income is lower means you’re moving money at a lower cost. Converting in an already high-income year could negate much of the future benefit.

Many people convert a portion of their accounts over several years to spread the tax impact and avoid jumping into a higher bracket in a single year. A year where you experience unusually low income (like the time between retirement and Social Security) can create a window where a conversion makes more financial sense than it otherwise would.

Once completed, a Roth conversion generally cannot be undone, so the decision deserves careful thought.

What Makes a Year a Good Candidate?

There’s no one right answer, but a few factors signal a favorable conversion year.

1) Your income is lower than usual. If you retired this year or had a significant drop in income for any reason, your tax bracket may be lower than it will be in the coming years.

2) You haven’t yet started taking RMDs. Beginning at age 73, you’ll be required to take distributions whether you need the funds or not. These assets contribute toward your taxable income for the year, so converting assets before RMDs kick in can give you more control over your tax burden later.

3) You have time before Medicare premiums are affected. Medicare Part B and Part D premiums are based on your income from two years prior. A large conversion can trigger IRMAA surcharges down the road, so you’ll need to evaluate that ripple effect before deciding when and how much to convert.

4) Your heirs would benefit from tax-free assets. Roth assets are generally passed tax-free. If legacy planning is part of your goals, converting now could reduce the tax burden your heirs face when inheriting traditional funds.

Why Is Q4 the Right Time to Evaluate?

Earlier in the year, too many variables are still in play to model a conversion accurately. By October, you know roughly where you’ll land on taxable income and how close you are to reaching the next tax bracket.

That clarity is what makes Q4 the right window for this conversation. A conversion completed before December 31 counts for the current tax year. If you wait until January, you’ll have to start the process over with a new set of income variables.

If a Roth conversion has been on your radar, now is the time to run the numbers while there’s still time to act.

The Bottom Line

A Roth conversion can be a powerful addition to your retirement strategy when the timing and tax math support it.

At Secured Retirement, we help clients evaluate opportunities like this within the context of their complete retirement plan. If a Roth conversion has been on your radar, talking with a qualified financial advisor is the right next step.

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