Why should you do Roth conversions?

Why should you do Roth conversions?

November 27, 2020

Tax rates are at historical lows. They are low compare to what we have seen in the past and likely lower than what we can expect in the future. See the graphic below which shows marginal tax rates for both the lowest and highest wage earners.

By converting your taxable IRAs now into tax free Roth IRAs, you pay taxes on the conversion today and lock in this low rate.

Here is an impact of partial Roth conversions on your tax bracket over time.

Before recommending Roth conversions to our clients we consider a number of different factors including:

  • What are the relative balances of your taxable investment accounts and bank accounts, employer plans, IRA, Roth IRA accounts? We are looking at tax diversification.
  • What is you current tax bracket compared to your projected future tax bracket?
  • How does your state handle taxation of your retirement accounts?
  • How many years until you reach the year in which you must start taking Required Minimum Distributions?
  • Do you plan to donate your Required Minimum Distributions once you reach 70 1/2?
  • What will your income look like once you are taking Social Security and receiving pensions and other sources of income?
  • How does the conversion impact your adjusted gross income, which impacts other factors such as Medicare premiums and AGI thresholds for deducting medical expenses. 
  • Do you have sources to pay taxes on conversion?

Fortunately, we employ several tools and software programs to make these calculations and projections. And we like numbers!

Let us know if you'd like to explore Roth conversions in 2021 or future years. We're game.