As 2025 nears its end, it's a good time to evaluate which money moves we should make before the taxable year comes to a close.
Clients often ask whether they should convert funds in tax-deferred retirement accounts into Roth accounts.
Roth conversions are a crucial part of your retirement picture, and there's typically little downside to protecting your wealth from the government in retirement.
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However, there are ripple effects that can impact many aspects of your financial life to consider. They need to be approached strategically before developing a plan.
Evaluate future tax rates
Taxes are the reason why you should consider funding a Roth account, whether it's through conversions or contributions. Any money in a tax-deferred account means only a portion of that money is yours; the rest is due to the IRS.
Future taxation is one of the keys to developing the right Roth strategy for you. We want as much tax-free money as we can to block Uncle Sam and the government from our finances, but it's important to look at it through a strategic lens.
If you're early in retirement and taxes are expected to go down in the future, converting to a Roth at the moment would be a poor choice. But if they're expected to go up, taking advantage of today's low tax rates could be a good choice.
Tax rates are currently low — the top federal income tax rate is 37%, compared with 70% in 1980. The Social Security Trust fund is shrinking, and the federal deficit continues to grow.
Despite the One Big Beautiful Bill Act (OBBB) making 2017's tax cuts "permanent," many experts believe taxes are likely to increase under future administrations. That means it could be a good idea to pay taxes now through Roth conversion and capitalize on growth without the burden of taxes looming over it.
Another factor is how much money you'll make in the future. If you expect to earn more, will it lead to a higher tax rate down the road? That's different for each family, but it needs to be considered.
Pay attention to the ripple effects
Future tax rates are just one piece of how Roth conversions could impact your finances. There could be significant financial consequences if you don't pay close attention.
Accidentally jumping to a higher tax bracket in the present is a common mistake. Each transfer adds to your taxable income and could lead to a higher tax rate, and it can make a substantial difference.
For example, couples with a taxable income from $23,850 to $96,950 have a tax rate of 12%, but that jumps to 22% on any income earned above that range. Avoid this by strategically spacing out your Roth conversions across multiple taxable years.
There are also nuances that can be complicated. If you open a new Roth IRA account, you must wait five years from the beginning of the first taxable year you contributed to withdraw without a 10% penalty.
That means even if you open a new account after you turn 59½ and use a Roth conversion to contribute, you must still wait to withdraw funds penalty-free.
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Other consequences of converting too much to a Roth include incurring a Medicare surcharge, higher taxation on your Social Security and the loss of the marketplace health insurance tax break (if those subsidies are renewed — that's up in the air during the government shutdown).
These are easy mistakes to make, and they can also be easily avoided with proper planning.
Work with a professional
I often hear from people caught in the trap of reading an article with a blanket recommendation about a specific Roth conversion strategy, and they want to follow that advice. Don't do that — it truly depends on your unique circumstances.
Roth conversion decisions shouldn't be made in a matter of months, but years in advance. As a financial professional, it's my job to evaluate your financial picture and understand these nuances.
If you work with accountants and CPAs, they might understand the tax implications, but they don't understand the long-term financial planning aspect of Roth conversions.
Roth conversions are a big deal, and for something as important as your retirement, don't mess around. Consider converting your savings into tax-free wealth and think about working with a financial adviser to help you navigate that strategy.
Insurance products are offered through the insurance business Medalist Wealth Management. Medalist Wealth Management is also an Investment Advisory practice that offers products and services through Impact Partnership Wealth, LLC (IPW), a Registered Investment Adviser. IPW does not offer insurance products. The insurance products offered by Medalist Wealth Management are not subject to Investment Advisor requirements. Investing involves risk, including the potential loss of principal. Guarantees and protections provided by insurance products, including annuities, are backed by the financial strength and claims-paying ability of the issuing insurance carrier. Any media logos and/or trademarks contained herein are the property of their respective owners and no endorsement by those owners of Matthew Eilers or Medalist Wealth Management is stated or implied. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Medalist Wealth Management is not affiliated with or endorsed by the U.S. Government or any governmental agency. Market Guard ® is a firm that provides investment signals, as well as portfolio allocation recommendations, for a wide variety of model portfolios. Market Guard ® does not offer advice or enter into fiduciary relationships. 4857030-09/25
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