Full Article Link: Yahoo Finance – 10 Times You Should NOT Do a Roth Conversion
Quote from Stephan Shipe
“If you’re still working and expect your income to drop in retirement, it often makes sense to wait. Paying taxes now at a high rate, when you could defer and pay at a lower rate later, can undermine the strategy entirely.”
—Stephan Shipe, Founder of Scholar Financial Advising
Key Takeaways
- Roth Conversions Are Not Always the Smart Move
While converting pre-tax retirement funds into a Roth IRA can offer long-term tax-free growth, it’s not a one-size-fits-all solution. The timing, tax implications, and your income strategy matter—especially near or in retirement. - Timing Is Critical
Dr. Shipe advises that Roth conversions are often best in low-income years—typically after retirement but before RMDs or Social Security kick in. That window can help you avoid unnecessary tax brackets and IRMAA surcharges on Medicare premiums. - Don’t Convert If It Pushes You Into a Higher Tax Bracket
Converting large amounts during high-earning years can bump you into higher federal tax brackets, making the conversion more costly than beneficial. Instead, consider smaller, phased conversions over multiple years. - Medicare and ACA Premiums Can Take a Hit
Roth conversions increase your adjusted gross income (AGI), which may lead to higher Medicare Part B and Part D premiums—or reduce ACA health insurance subsidies if you’re not yet 65. - Low-Income Earners May Not See Much Benefit
If your future tax rate will remain low, a Roth conversion may offer limited upside. Plus, if you lack cash outside your IRA to cover taxes, paying from the account reduces your retirement savings. - If You’re Leaving the IRA to Charity
There’s no reason to convert if a traditional IRA is being left to a charitable organization. Since charities don’t pay taxes, the full value of the IRA can be transferred tax-free without the upfront cost of a conversion. - Avoid One-Time Large Conversions
Spreading the conversion over several years helps you control the tax impact and avoid spikes in income. Also avoid conversions during years when bonuses, stock option income, or other lump sums could skew your tax bracket. - Additional Reasons To Hold Off
- You’re already receiving Social Security
- You’re drawing from a pension and are in a higher bracket
- You have a short life expectancy and may not live to see the tax savings
- You lack cash outside your IRA to pay the conversion tax
- Professional Guidance Is Essential
Tax laws change, and Roth conversions are complex. A fiduciary advisor can help you model scenarios, avoid unintended tax consequences, and determine whether the long-term benefit is worth the upfront cost.