From our blog:

How to use a Roth conversions to maximize tax-free income

Roth IRAs can be a great way to turn your retirement assets into future tax-free income.
Since the money inside the Roth Individual Retirement Account (IRA) has already been taxed, you don’t have to pay taxes on qualified distributions and you don’t have to take Required Minimum Distributions from these accounts.

And since we experienced the bear market, 2020 is a uniquely good year to consider a Roth conversion to minimize the taxes you have to pay and use the downturn to your advantage. 

However, there is a lot of fine print that comes along with a conversion and they’re not right for everyone, right now.


When could a Roth conversion be a good idea?

First, when you think you’ll be in a higher tax bracket in retirement. Whether because of higher income or moving to a high-tax state, 

Second, when your retirement account has lost value. Offsetting some of the taxes you will owe on the conversion

And most important, when you have money outside the account to pay the taxes.

When could a Roth conversion be a bad idea?

Firstly, when you expect to be in a lower tax bracket in retirement. If you’re in a higher tax bracket now, you will be paying taxes at a higher rate on the conversion than you would pay on the money coming out later. 

Secondly, when you don’t have cash on hand to pay the taxes you will owe or when you expect to need the money in the Roth sooner rather than later.  

If you withdraw money from your Roth IRA within five years of the conversion you might owe penalties due to the IRS rules. 

The bottom line is, Roth conversions are a great retirement and tax planning tool but the details and your personal situation matter a lot. And, under current tax rules, conversions are permanent – no take backs. 


If you think that a Roth conversion might be a good idea this year, please contact us to discuss your situation.

I will walk you through a step by step process to help you decide if a Roth conversion is right for you.  


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