This is the 'sweet spot' for Roth individual retirement account conversions, expert says (2024)

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This is the 'sweet spot' for Roth individual retirement account conversions, expert says? ›

After you stop working, but before you start required withdrawals from retirement accounts, is “the sweet spot” for Roth conversions, according to JoAnn May, a Berwyn, Illinois-based certified financial planner at Forest Asset Management.

Many consider the time between retirement and age 72 the “Roth conversion sweet spot.” This is because most people's incomes drop after they retire and stay relatively low until they have to take required minimum distributions (RMDs) at 72.

Overall, converting to a Roth IRA might give you greater flexibility in managing RMDs and potentially cut your tax bill in retirement, but be sure to consult a qualified tax advisor and financial planner before making the move, and work with a tax advisor each year if you choose to put into action a multiyear ...

Paying these taxes upfront can be a significant psychological hurdle, but it's a critical investment in your future financial security. An ideal candidate for Roth conversion is someone who understands the value of tax-free growth and is comfortable with the trade-off of paying taxes now to save more in the long term.

In its simplest form, the decision in favor or against a Roth Conversion can be boiled down to one question: Are you paying a lower tax rate now than you will be in retirement? If yes, there's a good chance that conversions make sense. If not, a conversion likely does not make sense.

The Five-Year Rule. The best time to convert from a traditional to a Roth IRA is generally when the market is down and your traditional IRA has lost value, and/or your income is unusually low, and/or your itemized deductions for the year have increased.

However, there are no limits on conversions. A taxpayer with a pre-tax IRA can convert any amount of funds in a year to a Roth IRA. Roth IRAs also are exempt from required minimum distributions (RMDs). These mandatory withdrawals from retirement accounts begin at age 72 and can create a tax burden on affluent retirees.

You're never too old to fund a Roth IRA. Opening a later-in-life Roth IRA means you don't have to worry about the early withdrawal penalty on earnings if you're 59½. No matter when you open a Roth IRA, you have to wait five years to withdraw the earnings tax-free.

How do I avoid paying taxes on Roth conversion? ›

There is no way to avoid paying taxes on a Roth conversion. However, you can lower your tax burden by timing the conversion right.

Bottom line. If you want to do a Roth IRA conversion without losing money to income taxes, you should first try to do it by rolling your existing IRA accounts into your employer 401(k) plan, then converting non-deductible IRA contributions going forward.

The Roth IRA five-year rule

The five-year rule could foil your withdrawal plans if you don't know about it ahead of time. This rule for Roth IRA distributions stipulates that five years must pass after the tax year of your first Roth IRA contribution before you can withdraw the earnings from the account tax-free.

If you expect yourself to be in a higher income tax bracket in retirement, a Roth IRA conversion may make sense. It's an opportunity to be tax-efficient with your retirement funds by paying the tax when your tax bracket is lower. In many instances, it is difficult to influence your tax bracket.

After you stop working, but before you start required withdrawals from retirement accounts, is “the sweet spot” for Roth conversions, according to JoAnn May, a Berwyn, Illinois-based certified financial planner at Forest Asset Management.

It may be especially useful if you think you'll be in a higher tax bracket later on. However, if your income is too high to contribute to a Roth, your employer offers a match, and you want to stash more money away each year, a 401(k) is hard to beat.

Assuming you have an estimate for your future marginal tax rate, prefer traditional when your current marginal rate is higher than that estimate, and prefer Roth when your current marginal rate is lower than the estimate.

Roth IRA Income Limits: For 2023, if your MAGI is $153,000 ($161,000 in 2024) or higher and you're single, or $228,000 ($240,000 in 2024) or higher and you're married filing jointly or a qualifying widow or widower, then you can't contribute to a traditional Roth IRA.

Roth IRA strategies for high-income households

If the only assets in any of your traditional IRAs are after-tax contributions, there is no taxable event with a backdoor Roth IRA because your after-tax contributions are not subject to income tax when converted to a Roth IRA.