Convert Everything to Roth? - Conversion Strategies to Maximize Tax Savings
Does it make sense to fully convert your IRA to a Roth? The root of this question is about future taxes you expect to pay. Fundamentally, it’s a bad idea to fully convert if you pay more in total taxes on the large conversions now than you would pay in future years for the regular, expected use of those pre-tax assets.
When you do the calculation, it’s important to look at all the components of income tax that you could pay by fully converting and total those up. That is, it’s not just your ordinary income tax rate, but also extra taxes you may be subject to like the tax on Social Security payments, IRMAA or the Medicare surcharge, and Net Investment Income tax.
You’ll want to compare this to what might be a regular use in your retirement of pre-tax assets. Two big things come to mind—if you are charitably inclined, giving to charity from your IRA as either QCDs or in your estate is one of the best ways to donate money. Second, if you need regular ongoing living expenses that you would be drawing from the Roth, you may be able to do that from a pre-tax IRA with a minimum of extra tax.
What you need is a tool to add up all those future years of expected income taxes and compare the total to what you would pay to convert everything to Roth. At Arnold & Mote, we have those tools and the necessary experience working with many clients who have tackled this exact question. Reach out today for a free consultation.
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