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Is a Roth Conversion Right for You?

Written by Jeff Diamond, AIF® on .

Learn about the key factors that will help determine if a Roth conversion is right for you and your retirement plans.

Learn the Pros and Cons and Understand More About This Strategy

If you’re looking for ways to boost your retirement savings, a Roth conversion may be a strategy worth considering. This move involves transferring money from a traditional IRA or 401(k) to a Roth IRA, where it can grow tax-free and be withdrawn tax-free in retirement. However, before deciding to do a Roth conversion, it’s important to understand the potential benefits and drawbacks, as well as the eligibility requirements.

Read on to find out more about Roth conversions to determine if it may be the right move for you.

What is a Roth Conversion?

A Roth conversion involves taking funds from a traditional IRA or 401(k) and transferring them to a Roth IRA. The funds will be taxed as ordinary income in the year of the conversion, but once in the Roth IRA, they can grow tax-free and may be withdrawn tax-free once you’re in retirement.

Benefits of a Roth Conversion

One of the primary benefits of a Roth conversion is the tax-free potential growth, mentioned above. Because the funds in a Roth IRA are not subject to taxes, they can potentially grow more quickly than they would in a traditional IRA. Additionally, since withdrawals from a Roth IRA are expected to be tax-free, a Roth conversion can help you better manage your tax burden in retirement.

Another potential benefit of a Roth conversion is the ability to leave tax-free funds to your heirs. Unlike traditional IRAs, Roth IRAs do not have required minimum distributions (RMDs) during your lifetime, which means that you can let the funds continue to grow and pass them on to your heirs tax-free.

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Drawbacks of a Roth Conversion

Despite the beneficial aspects, a Roth conversion won’t be right for everyone. One of the main drawbacks, of course, is the tax bill that comes with it. When you convert funds from a traditional IRA to a Roth IRA, you will owe taxes on the amount converted at your current income tax rate. Depending on the size of the conversion and your tax bracket, this could result in a significant tax bill.

Another potential drawback of a Roth conversion is that it could push you into a higher tax bracket, which could have negative implications for other aspects of your finances. For example, a higher income could impact your eligibility for certain tax credits or deductions you were relying on.

Eligibility Requirements for a Roth Conversion

In addition to taking into account the benefits and drawbacks of a Roth conversion, you also need to determine your eligibility. To be eligible, you must have taxable compensation, such as wages or self-employment income, and your modified adjusted gross income (MAGI) cannot exceed certain limits. For 2023, the MAGI limits for Roth IRA contribution or conversion are:

  • $228,000 for married couples filing jointly
  • $153,000 for single filers

If your MAGI exceeds these limits, you may still be able to do a Roth conversion by using a backdoor Roth IRA strategy.

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Determining Whether a Roth Conversion is Right for You

Whether or not a Roth conversion is the right move for you depends on a variety of factors. Some things to consider include:

  • Your current tax bracket. If you’re in a high tax bracket now, it may not make sense to do a Roth conversion, as it could push you into an even higher bracket.
  • Your future tax bracket. If you expect to be in a higher tax bracket in retirement, a Roth conversion could be a smart move to help you minimize your tax burden later in life.
  • Your time horizon. The longer you have until retirement, the more time your funds will have to grow tax-free, making you even more money in the long run.
  • Your financial situation. Do you have the cash on hand to pay the taxes that will be due on your conversion? Will a conversion impact your eligibility for other tax credits or deductions?

There are additional considerations, too, and whether a Roth conversion suits your needs depends on your unique financial circumstances.

Final Thoughts

A Roth conversion can be a powerful tool for tax-efficient retirement savings, but it’s not the right strategy for everyone. Before deciding to do a Roth conversion, it’s important to weigh the potential benefits and drawbacks and consider your unique financial situation. Consulting with a financial advisor or tax professional can help you make an informed decision and develop a personalized plan that aligns with your retirement goals.

If you’re interested in exploring whether a Roth conversion is right for you, book a call with Paces Ferry Wealth Management today. Our experienced team of advisors can help you navigate the complexities of retirement planning and develop a comprehensive strategy that’s tailored to your unique needs and financial goals. We look forward to hearing from you!

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.