Many investors have diligently saved in traditional retirement accounts, only to discover they’re sitting on a tax time bomb. Required Minimum Distributions (RMDs), Social Security, and rising tax brackets can erode your retirement income. Roth conversions offer a powerful solution—but only if executed with precision. This article explores when and why to convert, how to evaluate Roth contributions today, and what your heirs need to know.
Key takeaways:
- Roth conversions are not just about tax rates—they’re about creating flexibility and control over your retirement income.
- The “conversion sweet spot” often lies between retirement and, the time RMDs begin, but could also be in years when income is lower than normal.
- Spreading conversions over multiple years can help manage tax brackets and avoid Medicare surcharges as you become Medicare eligible.
- Roth IRAs offer tax-free growth and no RMDs, making them ideal for legacy planning and reducing income taxes during retirement.
- Beneficiaries of Roth IRAs inherit tax-free income, but planning is essential to avoid missteps.
Roth conversions are one of the most powerful tools in a wealth planner’s toolkit - but they’re often misunderstood or overlooked.
1. Why Consider a Roth Conversion Now?
If you expect your income tax rate to rise in retirement—or if you’re in a lower bracket today due to a recent retirement, business loss, or market downturn—a Roth conversion allows you to pay taxes now at a potentially lower rate. This can reduce your future RMDs and create a pool of tax-free income.
2. Timing Is Everything
The years between retirement and when RMDs begin are often ideal for conversions. You can “fill up” lower tax brackets gradually, avoiding spikes in income that could trigger Medicare surcharges or higher capital gains taxes.
3. Should You Be Saving Into a Roth Today?
For those still working, contributing to a Roth 401(k) or Roth IRA may make sense—especially if you’re early in your career or expect higher income later. Roth contributions grow tax-free and are not subject to RMDs, offering tax free income and flexibility in retirement.
4. Planning for Beneficiaries
Roth IRAs are especially attractive for heirs. Unlike traditional IRAs, distributions from Roth IRAs are tax-free. However, under the SECURE Act, most non-spouse beneficiaries must withdraw the entire account within 10 years—so strategic planning is still essential.
5. Most Efficient Roth Conversions
Roth conversions are most tax efficient when the tax dollars are paid outside of the funds you plan to roll from the traditional plan into the Roth. If that isn’t possible, a Roth conversion may not be right for you.
Now is the time to evaluate your Roth strategy
Contact your Comerica relationship manager or your professional tax advisor to determine if a Roth conversion aligns with your long-term goals. Comerica does not provide tax or legal advice -please consult your trusted advisors.
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