Big Decision To Make

By Admin Prepare

December 7, 2021

“Hello. My husband and I have saved a good amount of money for retirement. Most of it is in our pre-taxed IRAs and 401(k) retirement plans. We are concerned about tax increases in the future, so we are considering doing a Roth conversion this year. However, we are not sure we should do this. Can you provide some factors we should consider to help us in making our decision before the end-of-the-year deadline comes to make this move? Thanks so much.” Karen

Hello, Karen. You certainly are not alone in considering this option and in wondering if, how, and when to do it. Just like you, the majority of people have saved for retirement in pre-taxed retirement accounts, such as traditional IRAs and 401(k)s. This means that when that money is withdrawn, it is taxed at ordinary income tax rates for that specific year. In addition, those withdrawals could force other incomes, such as Social Security, to become taxable as well. Thus, with many people expecting tax rates to increase substantially in the future, distributions from these types of retirement plans could really cause a tax nightmare.

One potential solution to this is doing Roth conversions. A Roth IRA grows tax free and allows for tax-free distributions to the account owner, a surviving spouse, and beneficiaries. And one way of getting money into a Roth IRA is through Roth conversions. Of course, you must pay the taxes owed on the money when you do a conversion, but once that is done, the money is free and clear of taxes forever, including the growth on the money. So, how do you determine if you should do a Roth conversion? There are several factors to consider.

The main objective for pre-taxed retirement account money is to figure out how to pay the tax owed on that money at the lowest rate possible and/or to minimize the taxation on that money over time. So, you need to compare where you are at today (tax bracket wise) versus where you expect to be in the future. If you are in a very high tax bracket today and expect to be in a lower bracket at a later time, then you probably should not do a conversion now. If you are in a low tax bracket now, or in the lowest bracket you think you will ever be in, then you probably should convert at least enough to max out that tax bracket. Remember, taxes are owed on pre-taxed retirement account funds, so the objective becomes to determine when and how to pay the tax. Roth conversions give you the power and availability to choose when and how to do this instead of just waiting and letting Uncle Sam control the taxation of those dollars.

Now, if you decide to do Roth conversions, it may not be wise to convert all your pre-tax retirement account dollars. Why is that? Well, money that comes out of pre-taxed accounts that stays under the standard deduction, or that goes to charity, is not taxed. So, the goal would be to leave enough in your pre-taxed accounts that you can get it out tax free.

Another thing to consider is the effect that Roth conversions could have on your Medicare premiums. The cost of Medicare premiums is dependent on certain income thresholds. If you go over these thresholds, then your Medicare premiums could go up for at least a year. So, this could be another cost to consider before doing conversions.

Finally, there are other types of tax-free accounts such as life insurance. If you are wanting to do Roth conversions to pass your money on to your heirs tax free, then life insurance or other types of tax-free plans may be a better solution.

In my opinion, becoming as tax efficient as possible is one of the biggest keys to having a successful retirement plan. Roth conversions are certainly one potential way to do this, but it is a very big decision because there are many key factors you have to consider before making this move. And you must consider this very quickly because the deadline to do a Roth conversion is by the end of the year to count for that tax year.

To learn more about this topic and other important topics on retirement planning, visit the Prepare Institute website ( to find a retirement course or class near you.
Content is for educational and informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. You should contact your retirement and tax professional before utilizing any of the information in this article.