I'm a Financial Planner: If You're Not Doing Roth Conversions, You Need to Read This

Roth conversions and backdoor Roth strategies can be complex, but don't dismiss these strategic tax planning tools outright. They could work for you and your heirs more than you think. When you purchase through links on our site, we may earn an affiliate commission. Here’s how it works. Roth IRAs are a valuable tool for savers, but they remain underused. As of 2024, only 26% of U.S. households owned one.However, among those households, 65% said they have a defined strategy for managing income and assets in retirement.That suggests those who embrace Roth strategies often do so within a broader, disciplined plan.Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special IssuesProfit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.Profit and prosper with the best of expert advice - straight to your e-mail.Roth conversions can be a useful part of that plan, but they shouldn't be considered lightly. Before initiating a conversion, you should take a holistic view of your finances, work with your adviser and make sure you're well informed about the implications.Roth IRAs offer tax-free growth after age 59½ and a holding period of five years, which can increase your net income in retirement and help you build a stronger legacy for your loved ones.Shifting some of your pretax retirement assets into a Roth can lower future required minimum distributions (RMDs), thereby reducing taxable income. And under the SECURE Act's 10-year rule for most non-spouse beneficiaries, inheriting a Roth is more beneficial than inheriting a traditional IRA.About Adviser IntelThe author of this article is a participant in Kiplinger's Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.Because of the 10-year rule, it's advisable for beneficiaries to spread withdrawals over the decade from an inherited pretax retirement account to avoid a huge tax bill in the final year.While an inherited Roth is also subject to this rule, RMDs are not required until the last year, and that final withdrawal is tax-free. This flexibility allows beneficiaries to invest more aggressively in an inherited Roth than in an inherited traditional IRA.If markets are down in the 10th year, beneficiaries can also make an in-kind distribution to a taxable account, without triggering additional taxes.Of course, there are trade-offs. Taxes are owed on each Roth conversion, which increases adjusted gross income (AGI) for that year. The five-year rule also applies separately to each conversion, unlike a contributory Roth IRA.To maximize the benefit, taxes should ideally be paid from after-tax funds. Those without sufficient after-tax liquidity may not be good candidates for a Roth conversion.A Roth conversion may push you into a higher tax bracket, particularly at jumps like 12% to 22%, or 24% to 32%.To limit that impact, consider converting only enough to stay within your existing bracket. The 24% bracket is especially broad, allowing for larger conversions without higher rates.Additionally, single filers face higher brackets than joint filers. (A conversion opportunity may therefore arise after a spouse's passing, while the surviving spouse can still file jointly.)Other potential drawbacks include higher Medicare Parts B and D premiums owing to the income-related monthly adjustment amount (IRMAA), which is based on modified adjusted gross income (MAGI).For retirees, MAGI is usually slightly higher than AGI because it adds back certain items, such as the non-taxable portion of Social Security benefits and municipal bond interest.State and local tax rules can also present challenges.

In New Jersey, for instance, retirees with incomes below certain levels qualify for pension exclusions and property tax benefits, both of which could be affected by higher reported income from a Roth conversion.Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.Similarly, New York offers a $20,000 exemption per taxpayer on private pretax retirement income, on top of a full exemption on public pension income, allowing couples to convert up to $40,000 without state tax.Finally, high-income earners should be aware of the phase-down of the State and Local Tax (SALT) deduction, which further limits the ability to offset federal taxes. This change can reduce the overall benefit of large conversions for those already near SALT deduction caps.For those with a high income and ineligibility for direct Roth contributions, a "backdoor" Roth strategy may be an option, making non-deductible traditional IRA contributions, and then immediately converting to a Roth.In addition to the 59½ and five-year rules, the pro-rata rule must also be considered. Taxes on the conversion depend not only on the converted amount but on the total pretax IRA balance. This includes traditional, SEP and SIMPLE IRAs, but not 401(k)s.Those with large existing traditional IRA balances may not be ideal candidates for a backdoor Roth IRA, whereas those with a large 401(k) and no other pretax IRA assets may benefit more.Even among plans that allow Roth conversions, adoption remains limited: Only 32% of plan administrators said some of their plans permit Roth conversions, and 26% said most did.That gap underscores how underused these strategies remain, even as tax diversification becomes more valuable. There are two distinct backdoor Roth strategies:While after-tax contributions can be rolled over to a Roth IRA, any growth on them is still considered pretax, unless immediately converted.If the conversion feature becomes available only after significant after-tax growth has accumulated, participants should consider rolling over contributions to a Roth IRA and the growth on them to a traditional IRA before converting, to minimize taxes.This approach helps avoid taxes on the initial conversion and ensures a clean starting point. Opening a Roth IRA early also starts the five-year clock on tax-free growth sooner, avoiding delays when future rollovers occur.If you are phased out of a contributory Roth conversion and worried about the pro-rata rule, consider a small one-time backdoor Roth IRA contribution.A Roth conversion isn't right for everyone, but when done thoughtfully, it can be a powerful way to enhance retirement income, reduce future taxes and gain more control over your financial future.The right strategy depends on your income, time horizon and ability to pay the upfront tax bill without dipping into retirement savings.When approached carefully, with a clear understanding of how it fits into your broader goals, a Roth conversion can provide lasting benefits: flexibility in retirement, protection against rising tax rates and a more tax-efficient legacy for your heirs.Make sure to talk to a qualified financial adviser who can help you evaluate your options and make the right decision for your personal situation.This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.Matthew (“Matt”) Blecker, CFA®, CFP®, MBA, is Chief Investment Officer and Financial Planner at Eastern Planning, Inc., where he specializes in portfolio management, IRA distribution strategies and holistic retirement planning. Known for his analytical rigor and client-first philosophy, Matt designs customized portfolios that integrate investment, tax and behavioral insights to help clients sustain long-term financial well-being. A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg. Rather than letting the unknowns make you anxious, focus on building a flexible income strategy that can adapt to possible future Social Security changes. A "Stoic retirement" doesn't mean depriving yourself. It's a character-based approach to life and aging that can bring calm and clarity. A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg. Rather than letting the unknowns make you anxious, focus on building a flexible income strategy that can adapt to possible future Social Security changes. A "Stoic retirement" doesn't mean depriving yourself. It's a character-based approach to life and aging that can bring calm and clarity. Whether you have excess cash to spend or want to pretend, here’s a look at 11 ridiculous ways retirees can splurge. Most people can gift large sums without paying tax or filing a return, especially by structuring gifts across two tax years or splitting gifts with a spouse. 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