I Love Roth IRAs and Roth Conversions!

I love blueberries. I also am frugal and love saving money. Because of this, when I go to the store and blueberries are not on sale, I will not buy them. Although, if blueberries are on sale, then you know I am stocking up. My entire freezer and refrigerator are full during those times.

Just like blueberries, taxes are “on sale” right now, and you should be stocking up by opting for Roth IRAs, Roth 401(k)s and Roth conversions. Taxes are at near-record lows, and they are only expected to go up. There is a window of time before the Tax Cuts and Jobs Act sunsets in 2026 and tax rates revert to their previous higher levels. If you are like me and like saving money, then this tax sale will save you more money than any blueberry sale.

Taxes Are on Sale

We already know that tax rates are set to go up in the short term, but what about the long term? We can only guess, but many experts think tax rates will rise, and few people believe taxes will decrease over time. Also, our country currently has more than $30 trillion in debt (opens in new tab). My question is, how does our country earn revenue to pay off that debt? There are a few ways — including raising taxes.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Because of the above, my favorite investment is a Roth IRA — a true gift from the U.S. government. I often ask people where they would put all their money if they had a magic wand. The obvious answer is a Roth IRA, but most of the money U.S. savers have in retirement accounts is not in Roth IRAs. Even worse, only 20% of households owned a Roth IRA in 2020, according to the Investment Company Institute (opens in new tab).

But I am here to tell you about a powerful strategy that ANYONE can use to get a Roth IRA (assuming you have a tax-deferred investment). It doesn’t matter your income, age, employment status or even if you like the University of Michigan (Go Bucks! O-H). This strategy is a Roth conversion, and anyone can use it if they have an IRA. Also, there are no limits on how much you can convert. You could even convert every IRA dollar you have, although we typically do not recommend doing so. I have done Roth conversions for people for as little as $1,000 to well above $300,000. It just depends on your situation!

Roth conversions seem like a simple strategy involving a move from your traditional IRA to a Roth IRA, but they aren’t quite that straightforward. You have to worry about the effects of Social Security taxes, Medicare premiums, capital gains, the five-year rule, and so on. So, while the concept is simple, implementing it can be a little more difficult and leaves little room for error as you cannot change or revert a Roth conversion.

Why a Roth IRA?

The main reason why a Roth conversion makes sense can be understood by answering a question: Would you rather pay taxes on the seed or harvest? I am from Carroll, Ohio, a rural farming community outside Columbus. My best friend is a farmer and has an apple orchard. I asked him, “Would you rather pay tax on the apple seeds you plant or the harvest of those apples?” His answer was obvious — the seed. Roth conversions operate on a similar principle. For example, if you have $100,000, then you can pay taxes on that money now by doing a Roth conversion at a low tax rate, or you can wait until harvest and every dollar of growth during the intervening years would be taxable in an IRA.

Many clients also choose Roth conversions because, unlike a traditional IRA, with a Roth they do not have to take money out for required minimum distributions. A traditional IRA requires you to pull out money starting in the year after you turn 72, but some people may not need that money at 72 and would rather continue growing it tax-free for their beneficiaries, surviving spouse, emergencies and more flexibility in the future.

Be Prepared for the Tax Bill of a Roth Conversion

We can’t forget our least favorite word: “taxes.” If you do a Roth conversion, then you must pay tax on that money today. Nobody likes paying taxes, but remember, taxes are on sale now, and you either must pay the taxes on your IRA now or later! So, next time you look at your IRA or 401(k) statement, remember that there is a name missing next to yours: Uncle Sam.

When doing Roth conversions it is important to seek professional advice from a tax professional and financial professional. A small mistake can make a big impact. When deciding how much to do, it depends on your specific situation. One thing to consider is do you think you will be in a lower tax bracket in retirement, or do you think you’ll be paying taxing taxes at a higher rate in the future? The answer to that question could help determine whether a conversion is right for you.

Lastly, I want to tell you a story about my nephew. Every year for his birthday, I do not give him a physical gift. I’m not the favorite uncle right now. Instead, I put money toward an investment for him. He is not old enough to understand how beneficial this is for him yet, but when he turns 21, he and I will be best friends. He will be taking me out for steak dinners and driving me around in his sports car, right? We apply the same concept with Roth conversions. Yes, you must pay the tax now, and it isn’t as enjoyable as getting that deduction when you file your taxes at year’s end, but remember how much you can save and how much better it will feel to have control of your taxes in the future.

A Roth conversion can save you more money than any blueberry sale!