Let’s Talk about Roth Conversions (Article)

Let’s Talk about Roth Conversions

Warren Buffett once famously described compounding as the “8th wonder of the world,” yet in a traditional retirement account, one of the things you are compounding is your future tax liability. The best way to rectify this is to get as much of your retirement assets into a Roth account as possible. This sell-off presents an opportunity to implement a Roth conversion. Whether you hold your retirement assets in your employer’s qualified plan or in your own IRA, consider paying some ordinary income taxes now in exchange for a lifetime of tax-free appreciation from these discounted values. Depending on your time frame for withdrawing this money, this move can save you thousands, if not millions, in future taxes. This assumes, of course, you’re able to invest these Roth assets in a manner that allows for significant capital appreciation over time. It also assumes you have other assets you can liquidate to cover the tax bill which will come due next April to the pay the ordinary income tax you’ll owe on the amount you converted into Roth. Don’t worry wondering what your tax bracket might be a decade or three from now, what matters is the avoidance of all taxation on the gains that will compound in this account from this point on. You may be charged a fee for each Roth conversion, so be sure to research this before proceeding.

For many, converting taxable retirement accounts to Roth is best done with partial conversions over a number of years. This allows you to minimize the tax bill in any one year and avoid pushing yourself into a higher tax bracket. Generally speaking, if you have more than five years before needing the money, a Roth conversion makes sense to consider. Message your advisor with any questions you may have.

Return to the Money Messages Homepage



You’re Just Getting Started

Explore more from MoneyAdvice@Work®

Haga Clic Aquí para Ver los Consejos de Dinero en Español.

MoneyAdvice@Work® is an employer-sponsored financial wellness benefit designed to connect employees to financial professionals who educate, advise, and coach without the sales pitch. Learn more about our service offering here. The summary/prices/quotes/statistics contained herein have been obtained from sources believed reliable but are not necessarily complete and cannot be guaranteed.  Past performance results are not necessarily indicative of future results. MoneyAdvice@Work® is offered through Francis Investment Counsel, a Registered Investment Adviser with the SEC. Francis Investment Counsel does not provide tax or legal advice.