Why COnsider a Roth COnversion?

Advantages of a Roth Conversion

Tax-Free Growth and Tax-Free Withdrawals

Once the conversion tax is paid, there will be no further tax due on the funds inside a Roth account while it compounds, and no tax when you make withdrawals (after clearing the five-year rule and reaching at least 59 ½ or meeting another preapproved exemption).

Minimize or Eliminate Your RMDs

You must begin taking RMD's the year you turn 73. The amount of your RMD is based on your account balance and your life expectancy.

Roth IRAs are totally free of any required minimum distributions. And even if you only convert some of your traditional account balances, the smaller balances left in traditional accounts mean smaller annual RMDs when you turn 73.

RMD distribution percentages increase as you age and RMD distributions will likely trigger a higher tax rate, increased Medicare premiums and more taxes on your social security benefits.

Hedge Against Rising Tax Rates

Individual tax rates are near historic lows, and the federal deficit is near historic highs. There’s no crystal ball that lets you see where tax rates might be in five, 10 or 20 years, but paying some tax today might be worth considering—especially if you don’t expect your income to decline in retirement. Additionally, The Federal Income Tax is set to increase in 2026. With tax rates going up, now is the time to take steps to reduce your total lifetime tax liability.

For people who have built up solid balances in their investment and retirement accounts, by the time they take all their RMDs from traditional accounts and add in Social Security and other pensions they might be getting, plus take away the deductions they might have had access to when they were running businesses, being in a higher bracket in retirement isn’t all that unlikely.

Tax Diversification

If all your retirement savings is currently in traditional accounts, shifting some to a Roth account can make it easier to pay for big-ticket expenses without adding to your taxable income.

Whether it’s buying a car, helping grandchildren with college costs or a multi-generational trip, pulling extra money beyond your RMD from a traditional account will increase your taxable income for the year. On the other hand, all of the growth and income that occurs within the new Roth account will be totally free of income taxes - forever!

Eliminate the IRS from your IRA

Who do you love more, your family or the IRS? Easy answer but your planning needs to reflect your answer. Don't make the mistake of making the U.S. Treasury the primary beneficiary of your IRA!

When one spouse passes, the tax implications are significant for a surviving spouse who now becomes a single filer and still has to deal with RMD's and a burdensome tax liability.

If your intention is to bequeath an account, new rules that went into effect in 2020 require non-spouse beneficiaries to empty an inherited IRA within 10 years. If a non-spouse beneficiary inherits a Roth IRA, they still need to withdraw all the money by the end of the 10-year window, but they won’t owe any taxes.

Pension Pros