Roth Conversions Don't Always Pay: 3 Signs It's the Wrong Move for You
Key Points
A Roth conversion doesn't make sense if you expect to land in a lower tax bracket.
Be careful with doing a conversion if it's likely to trigger a big tax bill.
You may not want to do a Roth conversion if you want to donate your savings to charity.
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There's a big downside to saving for retirement in a traditional IRA or 401(k): These accounts eventually force retirees to take required minimum distributions, or RMDs.
If you don't like the idea of that, you may be considering a Roth conversion. With a Roth conversion, you move money from a traditional retirement account into a Roth IRA. From that point onward, your money gets to grow tax-free, you don't pay taxes on withdrawals, and you won't have to take RMDs.
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Roth conversions can be a smart strategy for a lot of people. But that doesn't guarantee they make sense for you. Here are three signs that they may be the wrong move.
1. You expect to be in a lower tax bracket in retirement
One of the biggest reasons to do a Roth conversion is to enjoy tax-free withdrawals at a time when your income and tax bracket may be higher. But if you expect your income and tax bracket to be lower in retirement, a Roth conversion doesn't make sense.
Your goal should be to pay the least amount of tax on your savings. If a Roth conversion doesn't make sense for you, it doesn't do you much good.
2. Your conversion could trigger a huge tax bill
When you do a Roth conversion, it's a taxable event. Any money you move from a traditional retirement account to a Roth IRA is taxed that same year.
But if you don't have an opportunity to do a Roth conversion when your income is low, you could end up paying a lot of taxes on that money due to your conversion being taxed at a higher rate. So, for example, if you work full-time right up until RMD age, you may not have a good opportunity to do a conversion.
3. You want to be charitable in retirement
It may be that you have enough income in retirement that you don't need your savings to live on. A combination of a generous pension and Social Security, for example, might cover your bills fully.
In a situation like that, you may decide to donate your retirement savings to charity. And if you do, a Roth conversion doesn't pay.
If you have money in a traditional IRA, you can do qualified charitable distributions, which allow you to send funds from your savings to a registered charity directly. Those donations won't trigger taxes for you, and they'll satisfy your RMDs.
Though Roth conversions can save a lot of retirees money in the long run, they're not necessarily a good strategy for everyone. Before making a Roth conversion, consider your future tax bracket, assess the tax consequences, and decide whether charitable giving is a priority. You may realize that sticking with a traditional retirement account makes the most sense.
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