Roth conversions are a tax-planning strategy that you can use to reduce the impact of taxes on your retirement portfolio. The strategy is a way to pay income taxes on pre-tax retirement funds (IRA, 401k, etc.) in exchange for future tax-free growth and withdrawals. The analysis is simple conceptually: if the assets in question would be taxed at a lower rate by converting them to Roth and paying tax on them today, versus waiting to pay the tax in the future when they are eventually withdrawn, then the Roth conversion makes sense. The strategy is especially effective if tax rates increase from current levels.

While this analysis may seem simple on the surface, there are other factors you should consider when determining if and how much to convert each year:

  • How will your future Required Minimum Distributions be impacted?
  • Can Roth conversions increase the inheritance you leave?
  • How will the additional ordinary income impact your Medicare premiums, social security taxation, or capital gains tax bracket?

Eagle Ridge will work with you and your accountant to determine whether a Roth conversion makes sense for you. Please contact us if this is a strategy you would like to explore.