With tax rates expected to increase in 2026 and possible changes to tax laws after the next election, now might be the perfect time to consider converting your retirement savings to a Roth IRA. But this decision isn’t one to take lightly—it’s complex and can impact other parts of your financial plan. It’s essential to work closely with your legal and tax advisors to make sure it aligns with all your financial goals.

Why Consider a Roth Conversion?

Here are a few factors to think about:

• Future Tax Rates: Do you think your tax rate will be higher down the road? If so, converting now could save you money in the long run.
• Retirement Spending: Will you need to rely on Roth assets for your living expenses in retirement?
• Liquidity: Do you have enough cash outside your IRA to pay the taxes on the conversion?

Even if you’re in a high tax bracket, converting to a Roth and paying taxes at today’s rates could still offer significant benefits. Here’s why:

1. Lock in Current Tax Rates: If you expect higher taxes in the future, converting now could save you money.
2. State Tax Savings: If you’re planning to move to a state with higher taxes, converting now could reduce your future tax bill.
3. Tax-Free Growth: Once you convert, your IRA assets will grow tax-free, not just tax deferred.
4. No Required Minimum Distributions (RMDs): Roth IRAs don’t require RMDs during your lifetime, giving you more control over your withdrawals.

Timing is Everything

The key to maximizing the benefits of a Roth conversion is time. The longer your assets can grow in a Roth IRA, the more you stand to gain from the conversion. For example, it might take nearly 20 years for a 55-year-old to see enough growth in their Roth IRA to offset the tax payment. But older individuals could realize the benefits sooner. Plus, Roth IRAs allow tax-free deferral even after your death, potentially continuing until after the death of your spouse and for another 10 years after that.

Reduce Risk with Tax Diversification

A Roth conversion can help you diversify your exposure to different tax rates. By holding a mix of taxable, tax-deferred, and tax-exempt accounts, you can better manage your tax brackets and withdrawals. This strategy also gives you more flexibility with your income in retirement, especially since traditional IRAs require distributions starting at age 73, whereas Roth IRAs do not.

Why Convert Now?

Several factors make a Roth IRA conversion especially attractive right now:

• Estate Taxes: The taxes you pay on conversion are excluded from your taxable estate.
• SECURE Act Changes: The SECURE Act of 2019 requires certain beneficiaries to withdraw inherited IRA funds within 10 years, making a Roth conversion more tax-efficient for your heirs.

Partial Conversions: A Flexible Approach

You don’t have to convert your entire IRA at once. Partial conversions can help you manage the tax impact more easily. If you have a year with lower taxable income, it might be a great time to do a partial conversion. Plus, market dips offer an opportunity to convert assets at a lower value. 

When a Roth Conversion Might Not Be Right

However, a Roth conversion isn’t always the best choice. Here are a few scenarios where you might want to stick with a traditional IRA:

• Lower Future Tax Bracket: If you expect to be in a lower tax bracket in retirement, converting now might not save you money.
• Other Tax Benefits: A higher income from a conversion could disqualify you from other tax benefits or increase costs like Medicare premiums.
• Short-Term Withdrawals: If you plan to withdraw from your IRA within five years, the penalties and taxes might outweigh the benefits of converting.

Final Thoughts

A Roth conversion can be a powerful tool for your retirement strategy, but it’s not a one-size-fits-all solution. Once you convert to a Roth, there’s no going back, so it’s crucial to weigh the pros and cons carefully. If you’re considering a Roth conversion, it’s wise to consult with an experienced advisor who can help you navigate the complexities and make the best decision for your unique situation.

Let’s connect and explore how a Roth conversion might fit into your retirement plan!

Investment advisory services are offered through Fusion Capital Management, an SEC registered investment advisor. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration is not an endorsement of the firm by the commission and does not mean that the advisor has attained a specific level of skill or ability. All investment strategies have the potential for profit or loss.