Will a Roth IRA Conversion Reduce Your Taxes?

Nov 8, 2023 | Investing, Planning Playbook, Taxes

What is a Roth IRA Conversion, and should you consider it? Three tax benefits of a Roth Conversion are reducing future income taxes, leaving retirement savings to heirs tax-free, and reducing the percentage of your Social Security benefits that are taxed. Watch the video to learn more about what a Roth IRA Conversion is and how it may save you money.

Hi, I’m Tony Marquez, Vice President and Wealth Advisor at GreenUp Wealth Management. A couple of questions many investors ask themselves is: What is a Roth Conversion, and should I consider it? A Roth Conversion is the process of moving money from a Traditional IRA or 401(k) to a Roth IRA. Let’s briefly review the differences between Traditional and Roth accounts.

With Traditional IRA and 401(k) accounts, you typically get to deduct your contributions from your taxable income in the year you make them and pay taxes in retirement when you withdraw money from your account. With a Roth IRA, you don’t get a tax break when you contribute, but your withdrawals in retirement are tax-free.

There are several reasons you may want to do a Roth Conversion. The first and most common reason is if you expect your tax rate to be higher in the future. Consider this example. This year, you decide to convert $5,000 from a Traditional IRA to a Roth IRA and you’re in the 22 percent federal tax bracket.

After paying 22 percent or $1,100 in taxes, you put $3,900 into your Roth IRA. Over the next 10 years, your Roth IRA doubles in value and is now worth $7,800. You may now take that money out of your Roth IRA tax-free since you paid the taxes when you made the conversion.

What if you never converted the $5,000 and it doubled over the next 10 years to $10,000? If you were still in that same 22 percent federal tax bracket, you would pay $2,200, leaving you with $7,800- the same amount as if you did the Roth conversion. But what if you were in the 32 percent tax bracket? After taxes, that $10,000 withdrawal would leave you with $6,800, making the Roth conversion your better option. If you were in a lower tax bracket, like the 12 percent bracket, your $10,000 Traditional IRA withdrawal would net you $8,800 after taxes, making the Roth conversion the inferior choice.

Will you be in a lower tax bracket, the same tax bracket, or a higher tax bracket in the future? It depends on your future income, and it depends on Congress. Legislation passed in 2017 that lowered income tax brackets will sunset in 2026, raising taxes for most taxpayers, unless Congress takes action.

A second reason to consider a Roth IRA Conversion is to leave retirement savings to heirs tax-free. The SECURE Act passed in 2019 requires that most non-spouse beneficiaries withdraw all assets from retirement accounts within 10 years. If your heirs inherit money within a traditional IRA or 401(k), the 10-year rule could push your heirs into a higher tax bracket, especially if they’re at the point of their lives when they have a high income. If your heirs inherit money in a Roth IRA, all distributions will be tax-free.

A third reason to consider a Roth IRA Conversion is to potentially lower your Medicare surcharge or the taxes you pay on Social Security. If you have Traditional IRA or 401(k) accounts, at some point you must make required minimum distributions in retirement from those accounts based on the account value. When you convert money from a traditional retirement account to a Roth, it lowers the amount you need to withdraw in the future, reducing your income.

The Social Security Administration uses your modified adjusted gross income to calculate your Medicare Part B and Part D premiums, and the IRS uses your income to determine what percentage of your Social Security benefits are taxable. By lowering your future income, you may be able to reduce your Medicare premiums and the taxes you pay on your Social Security.

Roth conversion rules and strategies can be complicated, and your financial situation is unique. Talk to your GreenUp Wealth Advisor to discuss the pros and cons to make the best decision for you and your individual situation. I’m Tony Marquez. Thanks for watching.


  • Tony Marquez, CFP®

    Senior Vice President | Wealth Advisor | Kansas City -- Tony is a Certified Financial Planner and has his master’s degree in Finance. Tony strives to be the expert, resource, and advocate that clients deserve when navigating a complex financial world. Prior to joining GreenUp Wealth Management in October of 2021, Tony worked as a Financial Advisor for a large financial services firm. There, he gained expertise in a variety of areas including financial planning, social security and retirement income strategies, college savings, and investment management.

    https://greenupwealth.com/meet-your-team/tony-marquez/ tony.marquez@greenupwealth.com Marquez, CFP® Tony

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