Do you feel confident about your retirement plan, or are you wondering if a strategy like a Roth IRA conversion could benefit you? As you approach retirement or settle into post-retirement life, it’s essential to explore whether converting funds from a Traditional IRA, 401(k), 403(b), or Profit Sharing Plan to a Roth IRA aligns with your financial goals.
At Truly Aligned Wealth Management, we work with families, professionals, and business owners who want their wealth to serve as a tool for creating meaningful opportunities and experiences. As wealth managers, we provide the clarity and guidance needed to navigate strategies like Roth IRA conversions in a way that aligns with your goals, values, and long-term vision.
When Does a Roth IRA Conversion Make Sense?
A Roth IRA conversion involves transferring funds from a pre-tax account, such as a Traditional IRA or 401(k), to a post-tax Roth IRA. While you’ll pay taxes on the converted amount now, the benefits include tax-free growth and tax-free withdrawals in the future. This strategy can be a powerful part of wealth management, but it works best when it fits seamlessly into your broader financial plan.
One of the best times to consider a Roth conversion is during lower-income years, such as early retirement before Required Minimum Distributions (RMDs) begin or after selling a business. For example, if you’ve recently retired and are not yet collecting Social Security, your taxable income may be at its lowest. Similarly, if you’ve recently sold a business and have a large cash reserve, this window of reduced taxable income can allow you to convert funds at a lower tax rate.
The United States has a progressive tax system, meaning the more you withdraw from Traditional IRAs, the higher your tax rate. If you have substantial cash reserves from pre-retirement savings or a business sale, it may be an ideal time to convert Traditional IRA funds to a Roth IRA and pay taxes at a lower bracket.
Another reason a Roth conversion makes sense is if you expect higher tax rates in the future. Historically, federal tax rates are currently lower compared to their average over the past 100 years. Whether due to potential changes in tax law or an increase in income from investments, planning for future tax burdens is essential. If you foresee significant RMDs in your 70s, converting funds in your 50s or early 60s can reduce the tax impact later.
A Roth conversion can also be an excellent strategy for leaving a tax-free legacy for your heirs. Unlike Traditional IRAs, Roth IRAs don’t require RMDs during the account holder’s lifetime, allowing the funds to grow tax-free for years. For families focused on generational wealth, this can be a key component of their financial strategy.
When a Roth IRA Conversion May Not Make Sense?
A Roth conversion might not be the right choice if you’re currently in a high-income year. For example, if you’re still working and earning a significant salary, converting funds could push you into an even higher tax bracket. Timing the conversion during lower-income years can save you more in taxes over time.
Another consideration is the impact on Medicare premiums. If you’re nearing age 65, the additional income from a Roth conversion can increase your Medicare premiums due to the Income-Related Monthly Adjustment Amount (IRMAA). This unintended consequence is something our wealth advisors frequently discuss with clients when evaluating Roth IRA conversions.
Finally, if you don’t have available funds to pay the taxes on the conversion, it may be better to wait. Using the IRA itself to cover the taxes reduces the amount left to grow and diminishes the long-term benefit of the strategy.
How We Approach Roth IRA Conversions
At Truly Aligned Wealth Management, we approach Roth IRA conversions as part of a larger, interconnected plan. Wealth management isn’t just about managing assets—it’s about aligning your wealth with your life goals and values.
Our wealth advisors take a comprehensive approach to Roth conversions by offering:
- Tax Analysis: Our in-house tax professionals evaluate your current and projected tax brackets to determine the most cost-effective timing for a Roth conversion.
- Scenario Modeling: We model long-term outcomes, including RMDs and potential tax burdens, to assess how a Roth conversion impacts your overall financial plan.
- Tailored Strategies: Every recommendation is personalized to fit your financial picture, whether your goal is reducing taxes, simplifying retirement, or building a legacy.
Take Action
A Roth IRA conversion can be a valuable strategy, but it requires careful planning and execution. If you’re considering whether a Roth conversion aligns with your financial plan, Truly Aligned Wealth Management is here to help.
Let us explore your unique situation and design a strategy that prioritizes what matters most to you—whether that’s funding your retirement, creating meaningful opportunities for your family, or leaving a lasting legacy.
Your wealth is more than a number; it’s a tool to create opportunities and build a future that reflects your values. At Truly Aligned, we are wealth managers dedicated to helping families like yours make thoughtful financial decisions that align with your goals. Let’s work together to align your wealth with your vision for the future.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. show less
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