Essential Considerations When Converting to a Roth IRA

Does converting part or whole of an existing traditional IRA to a Roth IRA make sense?

  • Wealth Planning

Essential Considerations When Converting to a Roth IRA

The 39.6% top tax bracket, up from 37%, is scheduled to return in 2026. With this in mind, does converting part or whole of an existing traditional IRA to a Roth IRA make sense? As always, individuals and their families should consult their wealth and tax advisors to determine the best path forward for them. 

Assessing the Advantages of a Roth IRA Conversion  

Roth IRAs have several advantages over traditional IRAs.

  1. Contributions to a Roth can be withdrawn at any time without tax or penalty because they have already been taxed.  
  2. Earnings grow tax-free and can be distributed tax and penalty free, as long as they are left in the Roth account for at least five years and after age 59 ½.
  3. Roth IRAs, unlike traditional IRAs, are not subject to the Required Minimum Distribution (RMD) Rules beginning at age 73 (age 75 for individuals born in 1960 or after). This feature gives Roth IRA owners and beneficiaries the opportunity to keep assets growing on a tax advantaged basis longer, especially now that the ability to ‘stretch’ the taxation of most inherited traditional IRAs has been impacted by the Secure Act and most inherited Roth IRA beneficiaries are not subject to annual RMDs during the 10-year distribution period. 

However, considerations must be made when making a decision to execute a Roth IRA conversion. 

Considerations for a Roth IRA Transfer 

When a conversion is made, the converted balance is taxed at the current marginal tax rates. Clients should consider the impact of future tax rates on traditional IRA distributions if a conversion is not made. Roth conversions make more sense when we believe tax rates on future distributions will be higher than they are currently. 

Consideration should also be given to the effects a conversion can have on other financial areas. For example, future traditional IRA distributions would increase taxable income and potentially make more of one’s Social Security benefits taxable while also potentially increasing Medicare premiums.  

Additionally, the time until someone needs to take IRA distributions for cashflow purposes or because of Required Minimum Distributions (traditional IRAs) is a paramount consideration. The longer one can let the converted balance grow, the more successful the conversion will be.

As such, when executing a conversion, one should use assets other than the IRA to pay the tax on the converted balance. Generally, using the IRA assets to pay the tax will significantly impede the successful outcome. Those who are already receiving distributions, or who will need distributions shortly for living purposes, will find it harder to justify converting to a Roth mathematically. 

Final Thoughts

Those considering a Roth conversion should examine the feasibility based on their individual situation. Rockefeller Global Family Office provides in-depth wealth management and tax policy expertise.  Connect with a Private Advisor as a resource to help you better understand how various factors can impact your retirement planning and outcome of a Roth conversion.


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