When considering a Roth individual retirement account conversion, experts emphasize the importance of timing. Roth conversions involve transferring pretax or nondeductible IRA funds to a Roth IRA, allowing for tax-free growth in the future. However, this also means incurring upfront taxes on the converted balance. The decision to convert a pretax balance depends on various factors, with one key consideration being the timing of the conversion.
According to certified financial planner JoAnn May, the “sweet spot” for Roth conversions is early in retirement when income is lower. This timing can help reduce the upfront tax bill associated with the conversion. Transitioning to a Roth IRA after retiring but before starting required withdrawals from retirement accounts could provide several advantages. These include leveraging lower income tax brackets and the potential sunset of certain tax provisions.
Following a Roth conversion, taxes are owed on the converted amount based on that year’s taxable income. However, this can result in a reduced taxable retirement balance subject to future required minimum distributions (RMDs). Unlike traditional IRAs, Roth accounts are not subject to RMDs, offering greater flexibility in retirement planning. Additionally, a Roth conversion can eliminate taxes for heirs who inherit the account, especially given the “10-year rule” for depleting inherited accounts.
Another important factor to take into account when contemplating Roth conversions is the impact on income-related monthly adjustment amounts (IRMAA) for Medicare Part B and Part D premiums. These adjustments are based on modified adjusted gross income (MAGI) and involve a two-year lookback period. Contributions from a Roth conversion can push individuals into higher income brackets, resulting in increased Medicare premiums. It is crucial to carefully assess how a conversion could affect these premiums and adjust strategies accordingly.
While Roth IRA conversions offer various tax advantages and future growth potential, careful planning and consideration are essential. Optimal timing, understanding the impact on taxes and required minimum distributions, and evaluating the effects on Medicare premiums are crucial aspects to weigh before making a decision. By working with a financial advisor and taking a strategic approach, individuals can leverage the benefits of Roth conversions while minimizing potential drawbacks.