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Roth Conversions

Kim Riewerts, CFP®

Director of Financial Education

Last Updated
October 27, 2022
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Why Now?

The current market environment has some investors wondering, “Is now a good time to initiate a Roth conversion?” There are many factors to consider when determining the timing of a Roth conversion, including your current and future income and tax rate, your legacy and estate planning goals, your plans for retirement and much more. Assuming other factors are favorable, there are two main reasons you may want to consider initiating a Roth conversion sooner than later.

A down market.

It often makes sense to initiate a Roth conversion in a down market. If you sell assets from a traditional IRA when the account value dips, you’ll theoretically be paying taxes on fewer assets. Hopefully, once you reinvest those assets in a Roth IRA, the market will recover, the value of your assets will rise again and you’ll be able to take advantage of tax-exempt appreciation.

For example, say your traditional IRA was worth $120,000 at the beginning of the year. Due to market fluctuations, the value has dropped to $80,000. If you initiate a Roth conversion now, you’ll owe taxes on just $80,000 rather than on $120,000. By reinvesting that $80,000 in a Roth IRA, you’ll be positioned for a market rebound and can someday withdraw those assets tax-free in retirement.

When it comes to considering a Roth conversion, now may be ideal timing for some but not for others. Consulting with your personal wealth manager will allow you to weigh your personal situation, tax bracket and long-term goals to discover whether now is right for you.

Low tax rates.

While it’s impossible to know for sure where tax rates will be in the future, tax reductions allowed by the Tax Cuts and Jobs of 2018 Act (TCJA) are scheduled to revert to their pre-TCJA levels on January 1, 2026. This could mean an increase in your tax rate. If you expect your income to be lower in the years leading up to 2026, it may make sense to initiate a Roth conversion sooner than later.

For example, if you’re between your early retirement years (or winding down your income) and starting minimum required distributions (RMDs) — presently required at age 72 — and you haven’t yet started receiving Social Security income or pension payments, it may make sense to complete a Roth conversion now rather than waiting until 2025.

Individual income tax rates

Rates and income tax brackets through 2025 are in black.
Rates and income tax brackets scheduled to go into effect on January 1, 2026, are in red.
Tax RateSingleMarried Filing Jointly
10%
10%
$0 - $10,725*
No Change
$0 - $20,275
No Change
12%
15%
$10,726 - $41,775
No Change
$20,276 - $83,550
No Change
22%
25%
$41,776 - $89,075
$41,776 - $101,175**
$83,551 - $178,150
$83,551 - $168,625
24%
28%
$89,076 - $170,050
$101,176 - $211,050
$178,151 - $340,100
$168,626 - $256,950
32%
33%
$170,051 - $215,950
$211,051 - $458,850
$340,101 - $431,900
$256,951 - $458,850
35%
35%
$215,951 - $539,900
$458,851 - $460,750
$431,901 - $647,850
$458,851 - $518,350
37%
39.6%
Over $539,900
Over $460,750
Over $647,850
Over $518,350
*Indexed for inflation
**Estimated, indexed for inflation
Source: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022

Other factors

In addition to the market environment and tax rates, the following considerations can help you determine whether now’s the right time to complete a Roth conversion.

Under what circumstances does a Roth conversion make sense?

      • You experience a year in which your income is lower than normal (job loss, market fluctuation, reduction in bonus or total income, etc.).
      • You believe you will fall into a higher tax bracket in the future.
      • You recently made a large charitable donation that reduced your taxable income.
      • You wish to reduce the amount of your RMDs in retirement.
      • You wish to leave a tax-free inheritance to your loved ones.

Under what circumstances does a Roth conversion NOT make sense?

      • The market is not down, and the conversion will put you in a higher tax bracket for the present year.
      • You have high taxable investment gains.
      • You expect to be in a lower tax bracket in future years.
      • You don’t have enough savings to pay the tax on the conversion.
      • You plan to leave your IRA to charity after you die (it’s typically better to donate appreciated securities, which can be passed along tax-free).
      • You will need the money in five years or less, as there is a five-year waiting period to withdraw converted assets without penalty.
      • You recently sold an investment, had higher-than-normal standard compensation or received a large bonus or a deferred compensation payout. Any large income events have the potential to push you into a higher tax bracket, which likely makes it unwise to complete a Roth conversion.
      • You have reached age 65 and are collecting Medicare. A Roth conversion may push you into a higher income threshold, resulting in higher monthly premiums. We advise working with your wealth manager to weigh the present and future impacts along with RMDs.

At Creative Planning, our teams specialize in helping clients make smart financial decisions that take into account a wide range of personal and economic factors. We’re glad to help you determine whether a Roth conversion makes sense, given your personal financial situation and goals for the future. To get started, schedule a call with a member of our team.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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