taxes

With Taxes on Sale, Consider a Roth Conversion to Make the Most of Lower Rates

Judging whether you’re a good candidate for a Roth IRA conversion requires some thought, but if you answer yes to these three questions, it could be worth considering.

Financial professionals have long debated the pros and cons, timing and how-tos of converting a traditional IRA into a Roth IRA.

Is it a good idea for you? Unfortunately, the short answer is, “It depends.” The longer answer involves predicting your income and income-tax bracket over many years — something that isn’t easy to do.

3 Questions to Assess Your Own Situation

You’d be wise to tap into the knowledge of your own tax and financial advisers, maybe even your estate attorney, to help you look at your personal situation. But you can start by asking yourself these questions:

If, like most people I talk to, your answer to all three questions is yes, then now may very well be the right time to explore converting some of your traditional IRA dollars to a Roth. Because, thanks to the 2017 Tax Cuts and Jobs Act, taxes are on sale.

No matter what you think about these tax reforms and what the long-range consequences will be for the country, the fact is that many people will pay less in taxes this year and until at least 2025. All the marginal tax brackets have been lowered except for couples and singles in the $400,000 range. And standard deduction amounts have increased to $12,000 for individuals, $18,000 for heads of household and $24,000 for married couples filing jointly and surviving spouses.

Fill Up Your Tax ‘Buckets’

Which means it’s time to take another look at your nest egg and how it’s built around the three tax “buckets” with taxable, tax-deferred and tax-free investments and savings.

If you’re like many savers, your tax-deferred bucket has been filling up slowly but surely over the years, as you’ve contributed regularly to a 401(k), 403(b) or some other workplace plan. And that’s great — except, depending on your future income, you could face weighty tax bills in the future, when you start withdrawals. Meanwhile, your tax-free bucket — which holds Roth accounts, most municipal bonds and properly structured cash-value life insurance — is likely lacking.

By converting some of the money in your tax-deferred bucket to your tax-free bucket, you can even things up. Yes, you’ll pay taxes now on the money you move, but with today’s lower tax rates, the bite might not be nearly as bad as it could be later. And in exchange, your Roth will give you tax-free growth and withdrawals going forward.

Final Thoughts

Your advisers may have preached before about eventually diversifying across all three tax buckets, but with these recent tax reforms, the concept takes on a bit of urgency. There are no limits on how much money you can move to a Roth IRA each year, but with careful planning you can avoid bumping yourself into the next tax bracket as you convert those savings. (Retirees also will want to be mindful about what extra withdrawals could do to the cost of Medicare.)

As a member of Ed Slott’s Master Elite IRA Advisor Group, I’m always trying to help people create tax-efficient strategies with their retirement income savings. Looking at a Roth conversion now is just one more way to do that. Take some time, do the math and see if it fits with your plan.

Kim Franke-Folstad contributed to this article.

Securities offered through Kalos Capital Inc. and Investment Advisory Services offered through Kalos Management Inc. Retirement Income Strategies is not an affiliate or subsidiary of Kalos Capita, Inc. or Kalos Management Inc.

Individuals should consult with a qualified professional for guidance before making any purchasing decisions.

  1. Do you think, between now and your death, tax rates will go higher?
  2. Do you expect the value of your retirement accounts to increase?
  3. If you had the opportunity to pay taxes on your retirement savings at a lower rate right now, would you grab it?

About the Author

Kristian L. Finfrock, Investment Adviser

Founder, Retirement Income Strategies

Kristian L. Finfrock is the founder of and a financial adviser at Retirement Income Strategies. He is an Investment Adviser Representative of Kalos Capital and a licensed insurance professional. He resides in Evansville, Wisconsin, with his two daughters.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Most Popular

7 Standout Places to Retire
Best Places

7 Standout Places to Retire

We picked cities across the U.S. that are affordable and offer the amenities retirees value most. Plus, one of them is bound to be close to family.
June 17, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
I’m Retired. Should I Pay Off My Mortgage?
retirement

I’m Retired. Should I Pay Off My Mortgage?

It’s a simple question. The right answer for you could depend on this: Where would you pull the money from to do it?
June 20, 2022

Recommended

Taxes on Unemployment Benefits: A State-by-State Guide
state tax

Taxes on Unemployment Benefits: A State-by-State Guide

Don't be surprised by an unexpected state tax bill on your unemployment benefits. Know where unemployment compensation is taxable and where it isn't.
June 23, 2022
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
June 23, 2022
10 Most Tax-Friendly States for Retirees
retirement

10 Most Tax-Friendly States for Retirees

Moving to a low-tax state in retirement can help make your retirement savings last longer.
June 23, 2022
Taxes in Retirement: How All 50 States Tax Retirees
Tax Breaks

Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus the District of Columbia, on how retirees are taxed. Some of the results might surprise you.
June 23, 2022