The Benefits of a Roth Conversion Before Year-End and How It Affects Taxes

As the end of the year approaches, it’s an ideal time to consider a Roth conversion as part of your financial strategy. Converting assets from a traditional IRA to a Roth IRA can offer substantial tax benefits, especially if you’re looking to minimize taxes in retirement. A Roth conversion can work in your favor, and acting before year-end might make sense.

Why Consider a Roth Conversion?

Unlike traditional IRAs, where withdrawals are taxed in retirement, Roth IRAs allow for tax-free growth and tax-free withdrawals, as long as you meet the requirements. With a Roth conversion, you move funds from your traditional IRA to a Roth IRA, paying taxes on the converted amount at your current tax rate. While this means an upfront tax bill, it may save you significantly down the line, especially if you expect to be in a higher tax bracket in retirement.

Tax Benefits of a Year-End Roth Conversion

Completing a Roth conversion before the end of the year has distinct tax advantages. The converted amount is taxed as ordinary income in the year it’s converted, so completing it now allows you to include it on your current year’s tax return. If you’re in a lower tax bracket this year or anticipate higher income in the future, a year-end Roth conversion can lock in taxes at a lower rate, potentially saving you money in the long run.

A Roth conversion also provides flexibility with Required Minimum Distributions (RMDs). Traditional IRAs require withdrawals starting at age 73, which are taxed as ordinary income. Roth IRAs, however, are not subject to RMDs, allowing you to grow your investments tax-free for as long as you like.

Is a Roth Conversion Right for You?
While a Roth conversion has many benefits, it’s essential to consider your current tax rate, retirement timeline, and future income expectations. A financial professional can help you assess whether the upfront tax hit of a Roth conversion aligns with your long-term goals.

The rules on Roth conversions are complicated, and this decision won’t necessarily work in everyone’s favor. If you’re interested in exploring the benefits of a Roth conversion before year-end, contact our office to schedule a consultation. We’ll review your unique financial situation and help you decide if this is the right strategy for you.