Are Roth Conversions Right for You?

By Ryan Glinn, CFP®, MBA, CLTC®
W3 Wealth Management

YOUNGSTOWN, Ohio – The volatile stock market of 2022 has triggered many Roth conversion articles. The theory here is that converting Traditional IRA dollars to Roth IRA dollars when the market is down allows the future growth during the market’s recovery to be tax-free in nature. Lower account values can also translate to less up-front tax pain upon converting. However, this strategy isn’t always a no-brainer for everyone. Here’s a few things to consider.

Start with understanding your current marginal tax bracket. When you convert a Traditional IRA to a Roth IRA, the entire conversion amount will be taxed at ordinary income rates. This could potentially trigger entry into a higher marginal tax bracket. Additionally, it may not make sense for an individual or
couple to convert dollars at higher tax rates today when their projected tax rates in retirement are likely to be lower than while they are working.

Those of you who are under age 59½ must consider the tax liability up-front. If you elect to withhold Federal and/or State taxes when executing your Roth conversion from your Traditional IRA, the IRS deems that withholding amount subject to 10% penalty. Most Roth conversions are done without withholding from the Traditional IRA, which requires cash or non-qualified investment assets to cover the tax bill.

Lastly, the goal of Roth conversions is to maximize long-term tax-free growth. The key here is long-term. It’s important to consider your break-even point. There is up-front cost via the tax bill generated by the conversion. It’s typically going to take multiple years of tax-free, compounding growth to offset this cost. Therefore, if you’re on the doorstep of retiring and you’re going to need to start withdrawals soon, the math may not support a Roth conversion.

These are a few factors to discuss with your financial advisor and tax professional prior to converting a Traditional IRA to a Roth IRA. Make no mistake, Roth conversions can be a great planning strategy for some families. It’s just imperative that they are done correctly and are a mathematical fit within one’s overarching financial plan.

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.The example(s) given are hypothetical and are for illustrative purposes. Actual results may vary from those illustrated.

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