Understanding the Truth About Roth Conversions
As you approach retirement, you've likely heard about Roth conversions as a potential tax-saving strategy. While these conversions can be powerful tools in your retirement planning arsenal, executing them without a comprehensive plan can actually increase your tax burden rather than reduce it.
Many retirees fall victim to what financial professionals call the "wild guess" approach to Roth conversions, moving funds from traditional accounts to Roth accounts without understanding the full implications or having a clear strategy. This haphazard approach could cost you thousands in unnecessary taxes and missed opportunities.
The Problem with "Canned" Tax Advice
Generic tax advice like "fill up the 22% bracket" or arbitrary conversion amounts ($25,000 or $30,000) without context are prime examples of incomplete planning. This type of guidance fails to consider:
• How you'll pay the resulting tax bill
• Where and how the converted funds will be invested
• How conversions fit into your broader income strategy
• Whether the conversion actually reduces your lifetime tax burden
Remember: Roth conversions are not the strategy itself, they are a tool within your comprehensive retirement plan.
What a Strategic Roth Conversion Plan Looks Like
A proper Roth conversion strategy is typically executed over 4–10 years (not one and done) and should be designed to:
• Reduce required minimum distributions (RMDs) later in retirement
• Minimize exposure to IRMAA (Income-Related Monthly Adjustment Amount) Medicare surcharges
• Balance withdrawals between pre-tax, Roth, and after-tax accounts for tax flexibility
• Provide tax-free income to heirs and surviving spouses, offering flexibility under the 10-year distribution rule for inherited accounts
Questions to Ask Before Your Next Roth Conversion
Before moving forward with any Roth conversion, ask yourself:
- How does this conversion fit into my overall retirement income strategy?
- What tax bracket will this conversion put me in, and is that optimal?
- How will I pay the resulting tax bill?
- Where will I invest these Roth funds to maximize tax-free growth?
- How will this impact my healthcare costs in retirement?
- What effect will this have on my Social Security taxation?
- How does this benefit my legacy planning goals?
Making Informed Decisions
If you have significant retirement savings in pre-tax accounts ($1 million or more), a professional analysis of your Roth conversion opportunities could save you hundreds of thousands in lifetime taxes. This is not about making a single transaction, it is about creating a strategic roadmap for the next 20–30 years of your life.
The most successful retirees understand that retirement planning is not about chasing trendy financial moves, it is about methodically building a comprehensive strategy that provides flexibility and tax efficiency throughout your retirement years.
By taking a strategic approach to Roth conversions within the context of your complete financial picture, you can truly maximize your retirement resources and enjoy the lifestyle you've worked so hard to achieve.
Disclaimer:
You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This video is intended for educational purposes only. Nothing in this video constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. MOKAN Wealth Management is a registered investment adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training.
