When Does a Roth IRA Conversion Make Sense?
Paying more taxes today may seem like an unusual financial strategy. Sometimes, however, it can help reduce the taxes you and your family pay over time.
A Roth conversion moves money from a traditional, tax-deferred IRA into a Roth IRA. You pay ordinary income tax on the amount converted today, but once in the Roth, the assets can grow tax-free, qualified withdrawals are generally tax-free and the original owner is not required to take annual required minimum distributions (RMDs).
So why voluntarily pay taxes sooner?
For many retirees, there can be a “golden window” after retirement but before RMDs from traditional retirement accounts begin. Income may be lower during these years, creating an opportunity to convert portions of a traditional IRA at potentially more favorable tax rates.
Conversions can also help reduce future RMDs, provide greater control over taxable income and Medicare premiums, and create a more tax-efficient asset for heirs.
Married couples have another reason to look ahead. After one spouse dies, the survivor generally begins filing as a single taxpayer and can reach higher tax brackets at much lower income levels. Converting some traditional IRA assets while both spouses are living may help reduce that future tax burden.
At Evermay, we believe financial planning should look far beyond what taxes you owe this year. We model Roth conversions across multiple years, considering your income, future RMDs, Medicare, estate goals and the assets available to pay the tax.
The question isn’t simply, “How can I pay less tax today?” It’s “When should I pay taxes to create the best outcome for my family over time?”
Disclosure: Evermay Wealth Management, LLC is a registered investment adviser. Prior to opening a managed investment portfolio, Evermay Wealth will obtain important information about your financial situation. Upon request we will provide you with our firm brochure that contains important information about the firm’s advisory and financial planning services, estate coordination and document production, fees, portfolio management, and investment strategies. Tax preparation and advice are offered through Evermay Tax, LLC. Evermay Wealth and Evermay Tax are separate but affiliated companies. Evermay Wealth and Evermay Tax are not law firms and do not provide legal advice. Depending on your facts and circumstances, if we are recommending a Roth Conversion. We will provide you with important analysis and information that should be reviewed carefully.
Andrew Sponaugle, CFP® is a senior wealth advisor and principal at Evermay Wealth Management. With nearly two decades of experience, Andy develops personalized investment strategies and comprehensive financial plans for individuals and families, helping them navigate complex decisions and align their wealth with their long-term goals. Evermay brings together wealth management, tax and estate planning to simplify life’s financial complexities, helping clients make confident decisions and build richer lives.