ADVERTISEMENT

ADVERTISEMENT

Commentary: What to consider before making a Roth conversion

We're both unabashed fans of contributing to a Roth within retirement plans, as the dual benefits of tax-free growth and tax-free withdrawals during retirement help you keep more of what's yours.

Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.
Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.

We're both unabashed fans of contributing to a Roth within retirement plans, as the dual benefits of tax-free growth and tax-free withdrawals during retirement help you keep more of what's yours.

Plus, the money in a Roth IRA is exempt from required minimum distribution rules, thereby giving you complete autonomy when deciding when to withdraw that money. If you're looking to bolster the number of Roth dollars in your portfolio, you can convert your tax-deferred savings to a Roth.

Performing a Roth conversion is something that, in theory, should be a relatively straightforward action. In practice, however, it can wind up being a complex decision, and it's something we get a lot of questions about.

Recently, we received this question regarding Roth conversions on our radio program:

"I have money in my 403b with the option of converting it to a Roth 403b. What do you recommend I consider before executing the conversion?"

ADVERTISEMENT

Most importantly, when you make a Roth conversion, it is a taxable event. This means that if you have $100,000 in a tax-deferred 403b and opt to convert that to a Roth inside of the plan, you'll incur a tax hit on that $100,000. For someone who may be in the 25 percent or 35 percent tax bracket, that's a tax bill of $25,000 or $35,000.

Furthermore, depending on your age, you may be in your peak earning years, and the amount of income you have today could be significantly higher than the amount of taxable income that you'll claim in retirement. If you expect your income to be lower in the future, it doesn't make a lot of sense from a tax perspective to make the conversion today.

Instead, a better way to limit the tax hit would be to wait until your income drops in retirement and then begin to convert that money to a Roth.

Another good way of limiting the tax bill from the conversion is to consider performing partial conversions over several years rather than converting the entire sum all at once. If we go back to our assumption of a $100,000 initial value, a better idea may be to convert $20,000 over five years, or $10,000 over 10 years. This will help keep the tax manageable, and it may potentially prevent you from moving into a higher tax bracket.

If you recently completed a Roth conversion and your income is higher than you expected or there's a downturn in the markets, you may want to undo that conversion. Fortunately, you have the option to reverse the conversion, although there is a relatively short time period in which you can undo the conversion. This process of reversing a Roth conversion is known as recharacterization. If you made the conversion and already reported it on your income tax return, you can file an amended return with the IRS.

We're big advocates of Roth conversions, given the right circumstances. It's important to remember that there is no one-size-fits-all plan to tell you when you should perform a

Roth conversion or how much of your tax-deferred money should be converted. A comprehensive financial plan that takes into account all of your finances can help you identify the right time and the right amount of dollars you should convert.

This information is not intended to be a substitute for specific individualized tax advice. We

ADVERTISEMENT

suggest that you discuss your specific tax issues with a qualified tax adviser.

By Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at

yourmoney@wealthenhancement.com . Securities offered through LPL Financial, member

FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services,

LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.

What To Read Next
Artificial intelligence can now act as an artist or a writer. Does that mean AI is ready to play doctor? Many institutions, including Mayo Clinic, believe that AI is ready to become a useful tool.
Even if it's not a lucrative venture, the hobby of raising rabbits continues at this farm near Sebeka, Minnesota.
While traffic has roughly doubled since 2020 — the heart of the pandemic, when there were 14.9 million passengers — it’s still not at pre-pandemic levels: In 2019, there were 39.6 million passengers.
The Dispatch earned a total of 31 awards in the Minnesota Newspaper Association's Better Newspaper Contest.