Roth IRA

Conversions

Although we are faced with uncertainty about future tax law, we currently have some of the lowest tax brackets in history. If you are in a low tax-rate year, and expect your rates to rise in the future, you should consider partial conversions of a tax-deferred retirement account to a Roth IRA. Although the conversion will create taxable income in the year of conversion, it can result in long-term tax savings by paying tax at a lower rate in the conversion year than you would on distributions in future years. This strategy should also be considered any time you have a uniquely low tax year, such as when making a large charitable contribution, are between jobs, or recently retired and not yet claiming Social Security.

Roth IRA conversions may also be advantageous over multiple generations. First, if your heirs may be in higher income tax brackets than you are, paying taxes at your lower rate now can save taxes across generations. Secondly, Roth conversions prior to death can reduce estate taxes by virtue of the income tax being paid during life, reducing the value of the taxable estate at death.

Additional Roth conversion considerations can be found here.