The Roth Conversion “Golden Window”

By Tanner Doudna

I am a big fan of Roth conversions. Not only do you control the rate at which you pay income tax, but once you have converted funds to a Roth IRA… the growth occurs tax-free instead of tax-deferred.

Determining if a Roth conversion is right for you is not an easy proposition. You need to consider your current tax situation, your future tax situation, if you can afford the extra tax hit, what dollar amount makes sense, etc.

Through my years of financial planning, I have found a sweet spot for the timing of Roth conversion – let’s call it the “golden window”. There can be a window in certain people’s financial journey where it is a perfect time to convert funds to a Roth. For most people, the sweet spot is in between retirement and taking Social Security, and sometimes even to RMD age (72 for now – see Secure Act 2.0).

Due to the cost of medical care (among other factors), people often target age 65 or later for retirement because they are eligible for MediCare. Also, we often encourage clients to wait until 70 to draw Social Security if they can afford to. If a client finds themselves in this situation and can afford to wait to take Social Security in addition to stomaching the taxes involved with a Roth conversion, it can be a very wise strategy.

They could potentially realize that income at a lower rate (usually 12%-15%) than maybe they would have when they started Social Security/RMD’s (often 22%-28%). In addition to the income tax savings, they reduce potential RMD’s down the road from the remainder of their IRA, have tax-FREE growth in their Roth, and provide a tremendous gift to their heirs (inheritance without the income taxes).

Roth conversions, like many financial strategies, only make sense for some people. We recommend you consult with your TrustWell financial advisor or a CPA before intentionally realizing income via a Roth conversion.