At EdgeRock Wealth Management, we aim to help you make informed decisions that align with your long-term financial goals. One impactful strategy in today’s tax environment is the Roth conversion, which can offer significant lifetime tax benefits when executed correctly.

While many are familiar with traditional retirement accounts, like the 401(k) or IRA, the potential advantages of Roth conversions are less widely understood. Does a Roth conversion make sense for you? That will depend on your situation, but we find they’re almost always worth exploring.

Beyond potential tax benefits, let’s also delve into how Roth conversions can provide greater control over your financial future and serve as a valuable tool for tax-optimized legacy planning.

Why Consider a Roth Conversion?

A Roth conversion involves transferring assets from a traditional retirement account, like an IRA or 401(k), into a Roth IRA. You’ll pay taxes on the amount you convert now, but the benefit is your investments in this account will now grow tax-free. Withdrawals during your retirement years will also be tax-free. Doesn’t sound too bad, right?

Over your lifetime, this can result in substantial tax savings, making it particularly advantageous if your current tax rate is lower than what you expect in the future.

People often assume their tax rates will be lower in retirement, because they won’t be earning a salary. However, this overlooks several factors:

• Taxable Social Security Benefits: Depending on your other income streams, your Social Security benefits may become taxable.
• Required Minimum Distributions (RMDs): RMDs from traditional retirement accounts can push you into higher tax brackets, increasing your lifetime tax liability.
• Loss of Deductions: In retirement you may no longer benefit from deductions like those for dependents or mortgage interest.
• Change in Filing Status: Losing a spouse transitions you from “Married Filing Jointly” to “Single,” resulting in higher effective tax rates due to lower income thresholds.

By converting assets to a Roth IRA now, you can lock in today’s tax rates, reduce future taxable income, and provide flexibility that may lower your or your spouse’s future tax burden. This is the kind of clarity most families are seeking when we first meet.

Tax-Efficient Legacy Planning

For most families leaving behind a legacy is important, but taxes can significantly reduce what you can pass on. Traditional retirement accounts are both subject to RMDs and must be fully distributed by non-spouse beneficiaries within 10 years upon inheritance, potentially increasing their tax bills due to increased income.

This erodes the value of your legacy over their lifetimes.

A Roth IRA doesn’t require RMDs during your lifetime, allowing you to grow these savings tax-free. And when heirs inherit a Roth IRA, even though they must still distribute the funds within 10 years, like a Traditional IRA, these distributions are not subject to taxation. This maximizes the value of what you leave behind and creates a more tax-efficient legacy, offering a similar lifetime tax benefits to your beneficiaries.

The Power of Control

An often-overlooked benefit of a Roth conversion is control. At EdgeRock, we want to ensure you have as much control over your financial future as possible. With a Traditional IRA or 401(k), you must start RMDs at age 73, increasing your taxable income and potentially affecting eligibility for tax credits or increasing costs like Medicare premiums. Over time, this can lead to higher lifetime taxes than anticipated.

Roth IRAs have no RMDs during your lifetime, giving you control over when and how much you withdraw. This flexibility allows you to manage your retirement income effectively, reduce taxes on Social Security benefits, and have a much finer set of controls on all things taxes. By strategically planning your withdrawals, you can optimize your lifetime tax situation.

The best time for Roth conversions is almost always now

At EdgeRock Wealth Management, we look to proactively manage your investments to optimize your lifetime tax benefits to pursue your financial future. While we’re not licensed tax advisors, we collaborate with strategic partners like CPAs and estate attorneys to tailor strategies like Roth conversions to your unique situation.

If you’ve used one of our strategies, please share this opportunity with friends or family who could benefit from a forward-thinking financial plan. Invite them to take the next steps toward pursuing a financial future by contacting us to schedule a conversation or join our upcoming speaking events.