Roth IRA Conversions: Pay Taxes Now, Save Big Later?

By Scott Fischer, Principal at Enza Financial

When you’re thinking about retirement, taxes probably aren’t the first thing that comes to mind, but they should be. One of the biggest financial decisions you’ll face is when to pay taxes on your savings. That’s where a Roth IRA conversion comes in.

What Is a Roth IRA Conversion?

A Roth IRA conversion means moving funds from a tax-deferred account, like a traditional IRA, into a Roth IRA. Because Roth IRAs are funded with after-tax dollars, withdrawals in retirement are generally tax-free, and Roth accounts are not subject to required minimum distributions (RMDs). This gives you more flexibility in how you manage income and taxes later in life.

Think of it as moving money from one “bucket” to another. You take funds from a traditional IRA (where you haven’t paid taxes yet) and move them into a Roth IRA (where you pay taxes now, but withdrawals later are tax-free).

When a Conversion May Make Sense

Paying taxes today might feel painful, but it could set you up for some serious wins down the road. There are several scenarios where paying taxes on your retirement savings today could be to your advantage:

• Expecting higher taxes in retirement: If you believe your tax bracket will rise later due to future tax policy, increased income, or larger required withdrawals, it may be smarter to pay today’s tax rate.
• Leaving more money for your family: A Roth allows your savings to grow without required minimum distributions (RMDs), which can preserve wealth for your beneficiaries, who may also benefit from tax-free withdrawals.
• Tax diversification: If most of your assets are in tax-deferred accounts, converting part of them into a Roth can give you flexibility to manage your income and tax liability in retirement.
• Low-income years: Business owners, retirees before Social Security, or anyone with an unusually low-income year may find this the perfect time to convert at a reduced tax cost.

Things to Keep in Mind

Not everyone benefits from a Roth conversion. It may not make sense for you if:

• You’re already in or near retirement and will need the funds soon.
• The conversion would push your income high enough to increase Social Security taxes or Medicare premiums.
• You’d need to dip into retirement funds or sell appreciated assets to pay the tax bill.
• You plan to give a significant portion of your IRA to charity through Qualified Charitable Distributions (QCDs).

Key Considerations

• Taxes are due at conversion: You’ll owe income tax on the converted amount in the year of the move.
• Plan strategically: Sometimes it makes sense to convert gradually over several years rather than all at once, especially to avoid jumping into a higher tax bracket.
• No do-overs: Since 2017, Roth conversions can’t be undone, so careful planning is critical if you’re going to make the switch.

Final Thoughts

A Roth IRA conversion can provide greater control, flexibility, and potential tax savings in retirement, but it’s not one-size-fits-all. The key is knowing how it fits into your financial picture. At Enza Financial, we work with clients to evaluate their current tax situation, retirement goals, and legacy planning needs to determine whether a Roth conversion makes sense.

If you’re curious about whether a Roth IRA conversion could benefit you, let’s chat! Together, we’ll build a strategy that best fits your financial goals.

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