Model Twice, Execute Once: Roth Conversion Analysis Done Right
One of the most underutilized and often misunderstood strategies in retirement and tax planning is the Roth IRA, particularly Roth conversions. Evolving tax laws, funding options, and legacy planning have made understanding how and when to use this strategy more important than ever.
A Roth IRA provides tax-free growth and distributions with no lifetime RMDs, unlike Traditional IRAs that require taxable withdrawals regardless of need. Despite these benefits, many high earners say, “I make too much money to do a Roth.” While this may limit direct contributions, especially outside workplace retirement plans, it does not eliminate the ability to build Roth assets through other planning strategies.
Contribution vs. Conversion
A Roth conversion moves assets from a Traditional IRA into a Roth IRA, triggering income tax on pre-tax contributions and earnings in the year of conversion. Once converted, those assets grow and can be distributed tax-free, providing long-term flexibility. This is where Roth conversions become a form of tax-rate arbitrage: paying taxes today at known rates to avoid higher or uncertain taxes in retirement.
Understanding the Pro-Rata Rule
When converting, the IRS looks at all Traditional, SEP and SIMPLE IRAs combined to determine the taxable portion. You cannot cherry-pick only after-tax contributions; the taxable amount is proportional to the ratio of pre-tax to after-tax funds across all balances. Ignoring this rule can lead to unexpected tax consequences.
Model Twice, Execute Once
Effective Roth conversions are rarely last-minute decisions. Early in the year, potential conversions should be modeled to estimate taxable income, marginal brackets, and downstream effects such as Medicare premiums or state taxes. Establishing guardrails early provides a framework for decision‑making.
Execution should wait until later in the year, after income, bonuses, capital gains, and deductions are clearer. Re-running the model allows adjustment of conversion amount, or skipping a year, to reduce the risk of overpaying taxes.
Use Market Downturns to Your Advantage
Market declines can improve the tax efficiency of Roth conversions. If stocks or ETFs fall significantly, converting at lower values reduces the taxable amount while allowing future growth to occur tax-free. If this situation doesn’t occur, conversions must still be completed by December 31. Spreading conversions over multiple years can help manage marginal tax rates and plan for cash flow to pay taxes with non-retirement assets.
Today’s Tax Rates Will Change
It’s dangerous to assume federal or state taxes will remain fixed. Even “permanent” laws can change with new Congressional majorities or administrations. Rising deficits, shifting fiscal priorities, and evolving state policies make future tax rates, deductions, and exemptions uncertain. Roth conversions create income insulated from these changes, offering greater tax diversification, flexibility and certainty in retirement planning.
Legacy Benefits Always Overlooked
Many analyses of Roth conversions stop at the death of the second spouse, overlooking benefits for children and grandchildren. Inherited Roth IRA distributions are tax-free, unlike inherited Traditional IRAs, where withdrawals are taxed at the beneficiary’s income rate.
If the original owner was taking RMDs from a Traditional IRA, those taxable withdrawals continue under the SECURE Act’s 10-year rule. With an inherited Roth, heirs face the same 10-year rule but no annual RMDs, allowing assets to compound tax-free and be withdrawn at the end of the period without generating taxable income or increasing the Adjusted Gross Income (AGI) of mid-career beneficiaries.
Take Ownership
By modeling conversions early, executing with updated knowledge, and taking advantage of market dips, you can reduce future tax uncertainty and preserve flexibility. Consult your Certified Financial Planner to see how Roth IRAs and Roth conversions fit into your holistic financial plan.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.
The original article appeared in the February editions of Local Town Pages for Holliston, Natick, Ashland, Franklin, Hopedale, Medway/Mills, Bellingham, and Norfolk/Wrentham. Additionally the Hopkinton Independent and the Community Advocate for Shrewsbury, Westborough, Northborough, Southborough, Grafton, Marlborough, and Hudson.
Please call me at (508) 834-7733 or directly schedule a meeting to learn more about considerations for planning and investing so you can balance kids, aging parents, and your financial independence.
PlanDynamic, LLC is a registered investment advisor. This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject or the article. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.
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