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Retirement Planning > Saving for Retirement > IRAs

4 Signs Your Client Is Ready for a Roth IRA Conversion

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What You Need to Know

  • The tax environment is favorable, but what does your client's unique situation look like? Here's what to consider.
  • A key consideration is your client’s tax bracket in a given year.
  • It’s important to remember that Roth IRA conversions have their own clock for the five-year rule.

Roth IRA conversions are all over the financial news. This is due to several factors that have come together to make Roth IRA conversions more attractive to many investors. These include:

  • The sweeping tax overhaul enacted in 2017 lowered tax rates starting with the 2018 tax year. These lower rates are scheduled to end with the 2025 tax year.
  • The Setting Every Community Up for Retirement Enhancement (Secure) Act eliminated the ability to stretch an inherited IRA for most non-spousal beneficiaries and requires that these beneficiaries fully withdraw the money in the IRA within 10 years. This applies to inherited Roth IRAs as well, but there is no tax to the beneficiaries in most cases with an inherited Roth IRA.
  • There are many unknowns as to what impact President Joe Biden’s tax proposals might have on rates, making Roth IRAs a viable option for many investors.

While the environment is favorable for Roth IRA conversions, the decision and the timing regarding a Roth IRA conversion should primarily be a function of the client’s unique situation as opposed to these external factors. Here are some signs that the time may be right for your client — and one more factor to keep in mind.

1. Your client earned less than usual this year.

A key issue to consider is your client’s tax bracket for the year. If your client is still working and falls into a lower-than-normal tax bracket, that can present an opportunity to do the Roth IRA conversion at a lower tax rate then they would incur during a more normal earning year.

This type of situation might occur for a number of reasons. Perhaps a significant portion of their income is variable, from bonuses or commissions, and this is a down year for them.

Any year that a client who is working finds themselves in a lower-than-normal tax bracket is potentially a good year to consider a Roth IRA conversion. Paying less in taxes on the conversion can enhance its long-term value.

2. Your client has retired but wants to delay Social Security.

One time period where your clients might find themselves in a lower tax bracket is their first few years of retirement. Their income is likely lower due to not receiving a salary or self-employment income. If they’ve decided to delay taking Social Security to maximize their benefit, this could provide a window of several years in which they are in a low tax bracket.

Planning a series of Roth IRA conversions during this period between retirement and drawing Social Security can allow clients to do these conversions while in a low tax bracket. Their income will rise once they claim their Social Security benefits. They will also experience a bump in income if they are subject to required minimum distributions when they reach age 72.

Another benefit for your clients will be reduced RMDs once they reach age 72. The money that is converted, plus any gains on that money, will not be subject to RMDs in the future. This allows the funds that are converted to grow tax-free. It can also help facilitate your client’s estate planning, especially if there are non-spousal beneficiaries on their IRA accounts who will be subject to the 10-year rule under the Secure Act.

It is important to remind your clients who have reached the age where RMDs have commenced that the RMD money cannot be diverted to a Roth IRA conversion and that RMDs must be taken before any conversions are done.

3. Your client wants to donate to charity.

Along the lines of managing your client’s tax bracket, if your client plans to give appreciated assets to charity, the tax deduction from these donations can be used to offset the tax hit of the Roth IRA conversion. It’s important that your client is able to take an itemized deduction for the contribution, however.

This might come into play for clients in 2021, especially as the ability to deduct charitable contributions up to 100% of a client’s AGI enacted under the Coronavirus Aid, Relief and Economic Security (Cares) Act has been extended into 2021. With the robust gains in the stock market that we’ve seen to date in 2021, this might create a scenario where it makes sense for clients with charitable inclinations to ramp up their giving of appreciated securities this year. Using some or all of these deductions to offset the taxes on the Roth IRA conversion can create a real win-win scenario for your client.

4. Your client has cash on hand.

While it probably goes without saying to most advisors, it’s critical that you ensure that your client has the cash available outside of their IRAs to pay the taxes. Having to take money from their traditional IRA to cover the taxes due will reduce the net amount that is ultimately converted to a Roth.

Additionally, the money to pay the taxes would end up as a distribution from the traditional IRA in this case. That money would be subject to taxes and to a 10% early withdrawal penalty if your client is under age 59 ½.

This type of situation would greatly diminish the benefits of a Roth IRA conversion and should be avoided in virtually all cases.

Don’t forget the five-year rule.

It’s important to keep in mind that Roth IRA conversions have their own five-year rule in addition to the five-year rule on any Roth IRA contributions. Each Roth IRA conversion has its own five-year clock. The IRS states that the oldest converted amount will be considered to have been withdrawn first. This means that your client may have to track the various five-year rules pertaining to their Roth IRA accounts.

This can potentially come into play with an inherited IRA with a non-spousal beneficiary. As long as the original account owner of the Roth IRA had met the five-year rule prior to their death, the beneficiary can withdraw the funds from the account tax-free. This would apply both to Roth IRA money that was contributed to accounts and to amounts that were converted from a traditional IRA.

While of course we can’t predict when a client will die, if one of the objectives in doing a Roth IRA conversion involves mitigating the tax impact of the inherited IRA rules under the Secure Act, this is something to keep in mind as part of your planning.


Roth IRA conversions can be a solid option for your clients. However, there is a lot of planning that needs to go into this decision, including determining the best time to make the conversion.


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