For many retirees and pre-retirees, tax planning is just as important as investment planning. One powerful, but often overlooked, strategy is the use of Roth conversions to potentially help reduce future tax exposure and create greater flexibility in retirement.
Roth conversions in a long-term tax plan involve transferring money from a tax-deferred account, like a traditional IRA or 401(k), into a Roth IRA. You pay ordinary income tax on the converted amount now, but once inside the Roth, the money grows tax-free—and qualified withdrawals in retirement are also tax-free.
The decision to convert is rarely black and white. But for those who are proactive about their long-term financial picture, Roth conversions may play an important role in a broader retirement income and tax strategy.
Why Consider a Roth Conversion?
Most retirement accounts—like traditional IRAs and 401(k)s—are tax-deferred. While that allows for growth without immediate taxes, it also creates a future tax liability. When you begin withdrawing from those accounts in retirement or once Required Minimum Distributions (RMDs) begin, the income is taxed at your ordinary income rate.
Roth conversions shift some of that future tax burden into the present. You pay taxes now but benefit from tax-free income later. Strategically done, this can help:
- Reduce taxable income in later years
- Lower the size of future RMDs
- Manage Medicare premium thresholds
- Create more flexibility in how and when you take income
Roth conversions in a long-term tax plan are especially useful in years when your income is temporarily lower or during the gap years between retirement and when RMDs or Social Security benefits begin.
How Roth Conversions Support Retirement Flexibility
One of the biggest advantages of Roth accounts is flexibility. Since Roth IRAs don’t have RMDs during the account holder’s lifetime, you can choose when—or if—you tap into them. This control allows you to balance income levels, plan charitable giving, or leave assets to heirs in a tax-efficient manner.
For example, if the market is down and your traditional IRA balance is lower, converting shares at that time could result in paying taxes on a smaller amount. Then, if the market rebounds inside the Roth, future growth occurs tax-free.
Roth conversions in a long-term tax plan can help spread tax liability over time rather than concentrating it in high-income years. This can be particularly helpful when you’re trying to stay below income thresholds that impact Medicare surcharges or the taxation of Social Security benefits.
Key Considerations Before Converting
Although Roth conversions offer benefits, they come with important considerations:
- Taxable Impact Now: The amount you convert is added to your taxable income for the year. This could push you into a higher tax bracket or affect other income-based calculations.
- Paying the Tax: Ideally, you should have funds outside your IRA to pay the conversion taxes. Using IRA funds to pay the tax reduces the amount that continues to grow tax-free.
- Timing Matters: Strategic timing—such as in early retirement years or in market downturns—can increase the effectiveness of the strategy.
- Legislative Risk: While Roth IRAs currently offer favorable tax treatment, future tax law changes could impact planning strategies.
It’s essential to evaluate conversions as part of a long-term strategy, not just a one-year tax tactic.
Roth Conversions and Your Estate Plan
Roth accounts can also play a role in legacy planning. Since distributions are tax-free for beneficiaries (within the rules of the 10-year withdrawal requirement), they may be more favorable than inherited traditional IRA assets, which are fully taxable.
If your goal includes leaving assets to children or other heirs, converting now could allow them to receive future income with fewer tax consequences.
Roth conversions in a tax plan are not just about your lifetime income—they may also support efficient wealth transfer and reduce future tax burdens on your family.
Building a Multi-Year Conversion Strategy
Instead of a single large conversion, many people benefit from a multi-year Roth conversion strategy. This involves converting smaller amounts each year to stay within a targeted tax bracket.
This approach helps:
- Avoid pushing income into higher tax brackets
- Coordinate with Social Security and Medicare thresholds
- Provide more consistent year-to-year tax management
A multi-year strategy allows for planning around other life events, market movements, or changing legislation. It’s a flexible, customized method to steadily shift assets into tax-free territory over time.
Personalized Planning Is Key
There’s no one-size-fits-all formula for Roth conversions. The right strategy depends on your current income, expected future tax rates, retirement timing, legacy goals, and other income sources.
At BA Schrock, we help clients evaluate whether Roth conversions fit into their broader plan. We consider not just the tax cost today, but the long-term impact on your income, healthcare costs, and estate goals. Together, we build personalized financial strategies that align with your vision for retirement.
If you’re interested in how Roth conversions could support your long-term tax planning, schedule your 15-minute introduction call. Let’s explore how this strategy could fit into your retirement goals.
