Roth conversions can be a useful strategy for some people to save on taxes and potentially grow their retirement savings, but there are also scenarios where it may not be the best option. Here are four scenarios in which you might want to avoid doing Roth conversions:
1. You’re currently in a high tax bracket:
If you’re in a high tax bracket, converting traditional IRA or 401(k) funds to a Roth IRA could result in a significant tax bill. It may make more sense to delay the conversion until you’re in a lower tax bracket, such as during retirement when you have less taxable income.
2. You expect your tax rate to decrease in the future
If you expect your tax rate to decrease in the future, for example, if you’re planning to retire soon or your income will be significantly lower in the coming years, it may be better to wait to do the conversion. This way, you can take advantage of the lower tax rate when you convert the funds to a Roth IRA.
3. You don’t have the cash to pay the taxes
When you convert traditional IRA or 401(k) funds to a Roth IRA, you’ll owe taxes on the converted amount. If you don’t have enough cash to pay the taxes, it may not be the best time to do the conversion.
4. You plan to leave the funds to heirs
If you plan to leave your retirement funds to heirs, it may not be the best strategy to convert the funds to a Roth IRA. Your heirs will inherit the tax basis of the Roth IRA, which means they’ll be responsible for paying taxes on the converted amount. If your heirs are in a higher tax bracket than you, this could result in a higher tax bill for them. In this case, it may make more sense to leave the funds in a traditional IRA or 401(k).
If you’d like to find out if Roth Conversions make sense for you and your financial situation, reach out to Lynn to schedule a chat at lynnt@herretirement.com