Roth IRAs can be a great way to turn your retirement assets into future tax-free income. Since the money inside the Roth has already been taxed, you don’t have to pay taxes on qualified distributions, and you don’t have to take Required Minimum Distributions.
When markets experience a down or volatile year and your portfolio loses value, it creates an opportunity to consider a Roth conversion to minimize the taxes you must pay, potentially helping you to leverage a downturn to your advantage.
However, there’s a lot of fine print that comes along with a conversion and they’re not right for everyone.
What are the factors to consider whether a Roth conversion is right for you this year?
First, you must look at the income tax rate differential between the year of conversion and the year of distribution. Let me explain. A Roth conversion will make sense if you think you’ll be in a higher tax bracket down the road when you take distributions.
A Roth conversion may also make sense when your retirement account has lost value, especially if you can offset some of the taxes you’ll owe on the conversion through tax loss harvesting. However, a Roth conversion may not be appropriate when you expect to be in a lower tax bracket in the year of distribution, because if you’re in a higher tax bracket now, you’ll be paying taxes at a higher rate on the conversion than you would pay on the money coming out later.
A Roth conversion would also be a bad idea when you don’t have cash on hand to pay the conversion taxes you’ll owe, or when you expect to need the money in the Roth account sooner rather than later, because if you withdraw money from your Roth IRA within five years of the conversion, you might owe penalties due to IRS rules.
Bottom line, Roth conversions are a great retirement and tax-planning tool, but the details and your personal situation matter a lot. And, under current tax rules, conversions are permanent. There are no do-overs.
Click here to subscribe to my Market Updates and receive more financial and tax tips.
Disclosures:
Investment advisory services offered through Robertson Stephens (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. Please consult with your investment, tax and legal advisors in regard to your own personal circumstances. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
Robertson Stephens paid no fee to obtain recognition but has paid licensing fees to reference its appearances on the Newsweek, USA Today, and FA Magazine rankings lists. See Awards Disclosures
Questions
How Does Robertson Stephens Manage Investments?
We build personalized portfolios based on your specific situation, including your risk tolerance, tax sensitivity, liquidity needs, and values. We use a disciplined approach that balances long-term growth strategies with short-term opportunities when they make sense. We continuously monitor your investments and adjust as needed, drawing on institutional-quality research and due diligence.
What Is Robertson Stephens’ Investment Philosophy?
Our investment philosophy focuses on protecting and growing your wealth through a disciplined, diversified approach that’s tailored to your specific situation — your risk tolerance, tax needs, and values. We blend long-term strategic investing with tactical opportunities when they make sense, using both public and private markets where appropriate.
Is Robertson Stephens Fee-Only, Fee-Based, or Commission-Based?
We work on a fee-based model, which means our compensation is tied to the assets we manage for you rather than commissions on products we sell. This aligns our interests with yours — when your portfolio grows, we do better too. The specific fee structure varies by client based on your situation and needs.
