• Discounts and special offers
  • Subscriber-only articles and interviews
  • Breaking news and trending topics

Already a subscriber?

By signing up, you accept Moneywise's Terms of Use, Subscription Agreement, and Privacy Policy.

Not interested ?

Is a Roth conversion right for you?

A Roth IRA is funded with post-tax dollars and you can enjoy tax-free withdrawals later. With a traditional IRA or 401(k), you fund the account with pre-tax dollars and pay taxes when you take distributions.

If you have adequate retirement income like Ehmke, doing a Roth IRA conversion of your 401(k) or traditional IRA might be a smart money move. Once you reach age 72 (73 if you reach age 72 after Dec. 31, 2022), you must take RMDs from your tax-deferred retirement account.

Yes, it does seem counterintuitive, paying taxes on distributions you’re not using just yet. When you roll over or transfer some of your funds from pre-tax dollars to a Roth IRA account, conversion rules mean that you will owe taxes. The amount you’ll pay is generally based on the amount you converted and where you fall on the income tax bracket.

But there are benefits since Roth IRAs don’t have RMD requirements while you’re alive and this could save you a significant amount on taxes.

Say you’re retired and the RMD amount plus your income coming in, whether it’s from a part-time job or dividends from other investments, is much more than what you need. Roth conversions could prevent you from being pushed into a higher tax bracket in the future. As the WSJ article notes, avoiding RMDs and keeping your income lower this way can also help prevent your Medicare premium rising or the 3.8% net investment-income surtax being triggered.

When you do a Roth conversion, you could find yourself in a higher tax bracket that year or see your Medicare premium rise. In order to avoid this, you could strategically make small conversions over time. As the WSJ article notes, "In general, Roth IRA conversions make sense if the saver’s tax rate on the converted amount is lower than what the tax rate would be on future withdrawals."

Also, if you want to be able to leave money to your children or heirs after you pass tax-free, Roth conversions could give you this opportunity to do so.

Discover how a simple decision today could lead to an extra $1.3 million in retirement

Learn how you can set yourself up for a more prosperous future by exploring why so many people who work with financial advisors retire with more wealth.

Discover the full story and see how you could be on the path to an extra $1.3 million in retirement.

Read More

Other key considerations

This approach suits higher-income earners who don’t need all of their RMDs or those who have low expenses in retirement. Seniors should also think of how they plan to pay for long-term care since those costs are tax deductible so paying for them out of a traditional IRA account may be better.

If you plan on taking distributions from your Roth IRAs, remember the five-year period guideline. Earnings are only tax-free if it’s been at least five years since you first contributed to the account. In other words, consider Roth conversions if you know you won’t need the money for at least five years.

Whatever you choose, understand that you can't undo a Roth conversion. It's also possible to have funds between your traditional and Roth accounts if it makes sense for your financial situation.

Sponsored

The richest 1% use an advisor. Do you?

Wealthy people know that having money is not the same as being good with money. WiserAdvisor can help you shape your financial future and connect with expert guidance. A trusted advisor helps you make smart choices about investments, retirement savings, and tax planning.

Sarah Li-Cain, AFC Freelance contributor

Sarah Li-Cain, AFC is a finance and small business writer with over a decade of experience.

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter. Advertisers are not responsible for the content of this site, including any editorials or reviews that may appear on this site. For complete and current information on any advertiser product, please visit their website.