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Retirement Planning > Saving for Retirement > IRAs

Roth IRA Conversions: When Is the Best Time?

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What You Need to Know

  • Conditions are currently ripe for Roth conversions.
  • Clients should fund the tax liability with non-IRA funds.
  • Remember that a client's tax bracket could be much lower during retirement.

While establishing a tax-free source of retirement income is generally a smart play for any client, there are some clients who will benefit more dramatically from a Roth IRA conversion strategy — and timing does matter.

Given the current political climate, the odds are strong that this year will be a prime time for clients to maximize the benefits of Roth conversions. Realistically speaking, we’re almost sure to see some type of income tax increase in 2022 — if not earlier — and with the economy rebounding on hopes of vaccine effectiveness, fortunate clients might even see an increase in income in the coming months.

Conditions are currently ripe for Roth conversions — and clients should be advised on who can benefit the most from the Roth conversion strategy to avoid missing out once this unique window closes.

Reasons to Consider a Roth Conversion Strategy in 2021

As most clients know, Roth IRA funds grow tax-free and are withdrawn tax-free during retirement. However, only clients with income below certain threshold amounts can contribute after-tax funds directly to a Roth. Higher income clients can fund a Roth by converting traditional IRA funds (usually contributed pre-tax) and paying tax on the converted amounts in the year of conversion.

Currently, income tax rates are at historic lows under the 2017 tax reform legislation. Nearly all of Biden’s pending proposals involve increasing the top income tax bracket to pre-reform levels — meaning that clients will pay more taxes on conversion if (and when) those proposals become law.

Despite this, clients should carefully evaluate their personal financial situations before executing a conversion. It’s important to examine both the current financial landscape and potential future changes in the client’s circumstances that could impact the value of a conversion today.

Practical Considerations When Considering a Roth Conversion

A tax-free source of income should be part of any well-diversified portfolio. It’s impossible for anyone to predict the future with 100% accuracy. Tax rates might increase — or the client might find themselves in need of extra funds during retirement. A Roth IRA offers a tax-free source of income to allow clients to control their taxable income later in life to avoid jumping into a higher tax bracket because of an unexpected financial need during retirement. 

Clients who anticipate higher tax rates or expect to be in a higher tax bracket in the future can minimize their tax liability by converting now. That way, they can pay taxes at the current lower rates — freeing up more funds for additional retirement savings.

On a related note, it’s always best to fund the tax liability with non-IRA funds. Clients who must rely on IRA funds to pay the taxes on a Roth conversion are essentially paying taxes on the converted funds that they’re using to pay taxes.

However, if the client has after-tax funds in the traditional IRA, a portion of the converted amount will be nontaxable (clients with both pretax and after-tax funds can’t simply convert the after-tax funds to take advantage of tax-free earnings; the law treats the conversion as pre-tax and after-tax in proportion to the composition of the entire IRA).

Some clients might anticipate having required minimum distributions (RMDs) from traditional retirement accounts that exceed their needs during retirement. Those RMDs are, under current law, taxable as ordinary income. To minimize tax liability during retirement, those clients might wish to execute a series of Roth conversions while conditions are favorable.

On the flip side, those clients should remember that their tax bracket could be much lower during retirement — meaning that they could pay taxes on the conversion at a higher rate during their working years.

Roth IRAs and Estate Planning

High-net-worth clients who anticipate an estate tax liability might also wish to consider a Roth conversion strategy. IRAs are included in calculating a deceased person’s taxable estate. If the estate is subject to estate taxes, that diminishes the value left behind to beneficiaries.

Once the beneficiary receives the post-estate-taxed account, they’re generally required to deplete the funds within 10 years under the Secure Act (unless the beneficiary qualifies as an eligible designated beneficiary). That means the beneficiary will be required to quickly pay income taxes after estate taxes have been levied. 

Distributions from inherited Roth IRAs are not taxable. Further, the client reduces the value of the account by paying income taxes during life — potentially reducing the value of the gross estate in the process. Given current uncertainties over the fate of the estate tax exemption and tax rate under the Biden administration, high-net-worth clients should consider the potential benefits of the conversion strategy.


When it comes down to it, none of us can predict the future. Evaluating whether a Roth conversion strategy is advisable is all about timing — and the client’s individual financial circumstances should be paramount in determining whether the time is right.


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