If you have spent decades saving into a traditional 401(k) or IRA, you have built a substantial nest egg. But that money has never been taxed. When you eventually withdraw those funds in retirement, the IRS will tax them as ordinary income. If tax rates go up in the future, or if you are forced to take large Required Minimum Distributions (RMDs), your tax burden could be significantly higher than you expect.
A Roth conversion is a strategy where you move money from a traditional, tax deferred account into a Roth IRA. You pay taxes on the converted amount in the year you make the transfer. However, once the money is in the Roth IRA, all future growth and qualified withdrawals are entirely tax free.
This strategy is not right for everyone. It requires paying taxes now to avoid potentially higher taxes later. But for many pre-retirees, the years immediately after you stop working and before you reach RMD age (currently 73) represent a unique window of opportunity. During these years, your income may be lower, allowing you to convert funds at a more favorable tax rate.
Deciding whether to execute a Roth conversion requires careful analysis of your current tax bracket, your projected future tax bracket, and your overall estate planning goals. We help you evaluate the math. We work to determine if a conversion makes sense for your specific situation and, if so, how much to convert each year to aim for maximum efficiency.