To determine whether a Roth conversion is right for you boils down to two rates, your current marginal tax rate, and your expected future marginal rate. If you believe your rate to be higher in the future, then you may benefit from a Roth conversion. If you believe it to be lower, then it may be best to wait to take income out until you are in your lower rate. If the rate will be the same in the future, then from a tax savings perspective the conversion is neutral (unless you pay the tax from a non-retirement account then there is a slight advantage to convert which the below calculator illustrates). It is important to note that it is your marginal rate that is analyzed and not just your ordinary income rate or your effective tax rate. A marginal tax rate is the percentage of tax that will apply to the next marginal- or incremental- amount of income. You would want to analyze this rate because $1 of additional income could potentially increase Medicare or health insurance premiums, increase the amount of Social Security benefits that are subject to tax, decrease the amount of tax credits received, make capital gains taxable etc. In other words, your ordinary federal income rate might be 12% but the marginal rate from additional income could be something like 30%! This makes determining whether a Roth conversion makes sense a little bit more complex, but we compiled bullet points on some of the main considerations when analyzing your future & current marginal rate which you can find below.

  • Social Security, Pensions and Required Minimum Distributions may result in higher income later in life which could increase your marginal rate.
  • A loss of a spouse could adjust your tax rate due to tax filing status changing from Joint to Single
  • Moving to a different state may result in a higher or lower rate in retirement.
  • Large charitable donations may decrease your current tax rate which could provide an opportunity to convert.
  • Legislation changes. Currently, the Tax Cut & Jobs act is scheduled to sunset in 2025 resulting in higher ordinary income tax rates.
  • Health Insurance premiums may be dependent upon taxable income before Medicare eligibility. If income is derived from non-taxable sources before 65 this may help keep premiums low.
  • Beneficiaries inheriting IRAs or qualified accounts and having to deplete the account by the 10th year due to the Secure Act legislation (not spouses).
  • Tax Diversification in retirement may help provide flexibility if unfavorable tax changes happen.

This list is not exhaustive, but it does provide some insight on scenarios to think about when determining whether a Roth conversion makes sense for you.  To see this concept illustrated further you can access a free calculator here:

*This is for informational purposes only and should not be interpreted as tax advice. Please consult your tax professional to better understand what make sense for your situation.