Roth Conversions Can Backfire. Here's How to Make Sure Yours Doesn't.

If you don't like the idea of paying taxes on your retirement plan withdrawals or having to take required minimum distributions (RMDs), a Roth conversion is something to consider. By moving money from a traditional retirement account to a Roth IRA, you can set yourself up to enjoy tax-free gains and withdrawals without having to worry about RMDs.

But there's a trade-off. A Roth conversion is a taxable event. And it's a move that could cost you in more ways than one if you aren't careful.

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How a Roth conversion could create an unexpected tax problem

One of the biggest mistakes people make with Roth conversions is forgetting that the money that's moved over counts as taxable income that year. For example, if you have $400,000 in a traditional IRA and you convert it to a Roth IRA in a single year, that $400,000 gets added to that year's taxable income.

Not only might that trigger a huge tax bill in the near term, but it could also have other consequences.

If you're on Medicare and are doing a Roth conversion in your late 60s, a large conversion in a single year could push your income up substantially. That could leave you with surcharges on your Medicare Part B and D premiums two years later, known as income-related monthly adjustment amounts, or IRMAAs.

How to make sure Roth conversions work in your favor

A Roth conversion could be a great way to reduce future taxes in retirement and give you more control over your savings. But it's important to have a plan.

Start by looking at your current income situation. If your income is on the low side, try to convert enough to a Roth IRA to fill up your current tax bracket so that you don't spill into a higher one. Then repeat that strategy across several years so you don't end up with a hefty tax bill -- or income -- in a single year.

Also consider whether you need to convert your entire retirement savings to a Roth. If you have $400,000 socked away, you may want to move $200,000 or $300,000 into a Roth IRA but keep the remainder in a traditional IRA for tax diversification.

Remember, having some taxable income in retirement could be a good thing. You never know what tax breaks might come down the pike that require you to have some taxable income to offset.

A Roth conversion could be a smart thing to do if you don't like the idea of paying taxes on retirement plan withdrawals or being forced to take RMDs. But like any major financial decision, it requires careful planning. Moving money into a Roth IRA strategically could help you get the most out of a Roth conversion without a massive tax bill or an unwanted Medicare surprise.

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