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Maximizing Retirement Savings: Three Reasons to Consider Roth IRA Conversions

Roth IRA Conversions Can Help Save Taxes

Successful tax planners understand the profound value of Roth IRA savings. A simplistic or short-sighted approach to Roth conversions, however, can result in diminished after-tax net worth over the long term. We often see do it yourself investors either overlook or incorrectly execute Roth IRA conversions.


The Benefits of Paying Taxes on Roth Conversions

One advantage to a Roth conversion is that your tax rate today may be lower than your tax rate in the future. When you do a Roth conversion and pay the tax from your taxable account, you eliminate the IRS bite on your traditional IRA and protect assets from taxes your taxable account might incur.

Think of any tax paid from your taxable account as an equal contribution to your Roth IRA. Though not an actual Roth contribution, it moves money from a taxable account, where it's taxed annually, into a Roth IRA, where it will never be taxed again.


Reducing Future Required Minimum Distributions (RMDs)

The government encourages retirement savings by allowing tax deferrals on traditional IRA contributions. However, once you reach a certain age, typically between 72 and 75, you must start taking RMDs—mandatory withdrawals from your retirement accounts on which taxes are due.

The amount you must withdraw annually is based on a predetermined formula, which increases as you age. For instance, at age 75, you must withdraw approximately 4% of your account balance. Over time, as your account grows, so does the amount of your RMD, which can push you into higher tax brackets.

By converting traditional IRA funds to a Roth IRA, you effectively reduce your future RMDs. This conversion decreases the amount subject to mandatory withdrawals and subsequent annual taxation, allowing more of your assets to grow tax-free within the Roth IRA.


The Beauty of Partial Roth Conversions

The good news is IRAs don’t have to be converted in total. Our tax planning software enables us to model your situation, projecting taxes into the future. We can fill up lower tax brackets with partial Roth conversions over several tax years to optimize your Roth conversion strategy.

Roth conversions offer numerous tax-saving opportunities, from paying conversion taxes upfront to protecting more of your assets from the annual taxation of RMDs. With thoughtful and strategic planning, the value of systematic Roth conversions can be much higher than expected. By reducing your RMDs, you safeguard your retirement savings from excessive taxation, ensuring a more secure financial future.

 We invite you to contact us if you’d like to explore the benefits of Roth conversions and consider how they might fit into your long-term tax strategy.