Roth Conversions attract a lot of conversation in the personal tax and wealth management realm.  Here are some common overall goals of a Roth Conversion and some general scenarios where the strategy may be particularly appropriate.

Overall, the goals of any Roth Conversion mostly fall into the following categories:

• use up as much of the lower tax brackets as possible.
• achieve tax diversification.
• use as a possible tax rate hedge.
• incorporate estate planning where appropriate.

Here are 3 broad categories where we find Roth Conversions to be of merit and consideration:

• Business Losses or a Large Deduction
  • A business loss generated from operational losses or potentially a capital purchase could present a Roth Conversion opportunity.
  • A taxpayer might also contemplate a Roth Conversion in the same year a large charitable deduction is made, to make use of lower income tax bracket rates.

• Milestone specific conversions – early retirees
  • When taxpayers are in their early retirement years – meaning “pre-social security” or “pre-RMD age”, they can find themselves in an unfamiliar situation of facing no or very low income.
    • The early retirement years can provide great strategic shelter of low tax brackets for the purpose of Roth Conversions.
    • Please make note of the changes in income tax brackets and expanding standard deductions – for 2023, in a married filing joint return, it takes Gross Income of more than $117,000 before you exceed the 12% bracket (higher if you’re over 65)
  • Other potential benefits of conversions in early retirement (pre-age 63) could include the ability to steer clear of higher “mandatory” income later in life, when Medicare premiums look at income levels and IRMAA surcharges could result.

• Estate Planning
  • These are very case specific, but there could be estate planning situations where Roth Conversion strategies make sense.
    • When the heirs appear to be in the same or higher bracket than the current owner, the current owner could pay the tax at their rate.
    • This would serve the dual purpose of getting the taxes paid at today’s rates AND reducing the overall size of the estate today.
  • A Roth Conversion allows the assets to continue to grow and be passed on income tax free to the heirs.

As you might imagine, these situations are very case specific.  We can team up with our wealth management group as needed to help you gain a comprehensive perspective on the advisability of a Roth Conversion.