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To Roth or Not to Roth?

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Learn why it may be an advantageous time to convert your retirement savings to a Roth IRA.

With income tax rates scheduled to increase in 2026 and potential tax policy changes post-election, now may be an opportune time to consider a Roth conversion.

The decision to convert to a Roth IRA is complex, may impact a range of other tax planning decisions and should be made in coordination with your legal and tax advisors to ensure it is aligned with all of your financial goals. Factors to consider include whether your effective tax rate is likely to be higher in the future; whether you will rely on Roth assets to support lifestyle spending needs in retirement; and whether you have sufficient liquidity outside the IRA to pay the income tax due upon conversion.

That said, even for investors in the top federal tax bracket, converting to a Roth and paying the associated taxes at current rates may have compounding benefits. These include:

  • Locking in current income tax rates if you expect future rates will be higher.
  • Paying the tax now may reduce your state income tax bill if you plan to move from a state that does not tax IRA distributions or that imposes tax at very low rates to a state that taxes traditional IRA distributions at higher rates.
  • Qualified Roth IRA distributions are not subject to income tax. By contrast, earnings on all traditional IRA contributions are taxed at ordinary income tax rates — and only the value of non-deductible or after-tax contributions are exempt from taxation. In other words, once converted, IRA assets no longer grow on a tax-deferred basis, they grow tax-free.
  • Tax diversification, flexibility to manage tax brackets, tax-free withdrawals and no required minimum distributions (RMDs) during the life of the IRA owner.

In addition to tax rates, your time horizon is an important factor to consider before implementing a conversion. The benefit of the conversion is the ability of the assets in the Roth IRA to grow tax-free — so the maximum benefit requires time for growth to occur.

In the analysis below, for example, it would take nearly 20 years for a 55-year-old to earn sufficient growth in their Roth IRA assets to make up for the tax payment for conversion. All else held equal, however, an older individual will realize the benefits of a conversion quicker. The Roth IRA owner (and the owner’s spouse, if they are the beneficiary of the Roth) are not subject to RMD rules applicable to traditional IRAs. This allows the tax-free deferral to potentially continue until after the death of both spouses, and for a 10 year period after the couple’s deaths.

Increased Net Proceeds with Roth Conversion

Comparing after-tax proceeds, over 40 years, assuming a constant tax rate of 37%:

Reduce Risk Through Tax Diversification

A Roth conversion allows you to diversify exposure to income taxes rates: You can achieve tax diversification by maintaining a mix of taxable, tax deferred (401(k)/IRA) and tax-exempt accounts (Roth 401(k)/Roth IRA) with varying rules for taxation and withdrawals. This reduces the range of possible after-tax outcomes by mixing strategies that presume tax rates will go up with those that presume they will go down.

Pairing tax diversification with a mix of asset types also enables more effective tax planning. Additionally, distributions are required from traditional IRAs starting at age 73, whereas Roth IRAs do not require distributions. A retiree who owns both traditional and Roth IRAs may be able to minimize income taxes by coordinating their mandatory taxable withdrawals with their discretionary tax-free withdrawals.

Why Convert Now?

There are several factors that make a Roth IRA conversion attractive. Most simply, estate taxes are here to stay, and the taxes paid on conversion are excluded from your taxable estate.

Additionally, the SECURE Act of 2019 eliminated the ability of most beneficiaries to “stretch” distributions over the beneficiaries’ life expectancy. The prior law’s grant of lengthy distribution deferral for inherited IRAs (allowing the beneficiary to withdraw the funds over many years, often decades) reduced the potential savings from a Roth conversion. Now that certain beneficiaries must withdraw within a 10-year payout from any inherited IRA, it is more likely that an earlier Roth conversion will save taxes, overall. Notably, the IRA owner’s adult children (who are neither disabled nor chronically ill) are among the beneficiaries subject to the 10-year payout for both traditional and Roth IRAs under the new rules.

It Is Not All or Nothing — But It Is Permanent

There are different strategies to consider when weighing the benefits of a Roth conversion, such as a partial conversion of your retirement account. The tax impact of a smaller, partial conversion will be easier to mitigate. If your overall taxable income is lower in a given year, being in a lower tax bracket offers an even more valuable opportunity to complete a partial conversion, pay less tax on the conversion and diversify the types of accounts owned with different tax treatment. There may also be opportunities to take advantage of dips in the market to convert assets at a lower value.

However, a conversion may not be appropriate in all situations. Some instances in which you may be better off keeping the assets in a traditional IRA include:

  • If you anticipate being in a lower tax bracket in retirement because you plan to retire to a state with a lower (or no) income tax on retirement plan distributions, your retirement income will be less than your income now or if you anticipate lower income tax rates in the future, you may not benefit from a conversion.
  • If a higher income this year because of the conversion would disqualify you for other tax benefits you planned to use, such as the clean vehicle tax credit, or would increase your other costs, such as raising your Medicare premiums, you may want to delay or skip a conversion.
  • If you plan to make a withdraw from your IRA within five years, you will pay tax on the portion of your withdrawal that is attributable to earnings in the Roth IRA and a 10% penalty, and otherwise will not be able to maximize the benefit of the conversion.

An analysis of facts and circumstances is always required to determine if a Roth conversion makes sense for your unique situation. But beware: Once your IRA is converted to a Roth, you will not be able to turn it back into a traditional IRA. If you think a Roth conversion might benefit you, consult with an experienced advisor now.

Multigenerational Families

Roth IRAs

Should you convert now?

THE NORTHERN TRUST INSTITUTE

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  1. An “eligible designated beneficiary” describes a category of IRA beneficiaries entitled to withdraw the account over their remaining life expectancies. This rule applies to an account for the sole benefit of the IRA owner’s surviving spouse, as well as to several less common scenarios, such as an account benefitting a special needs trusts for a permanently disabled person.
  2. This does not mean that all current factors favor a Roth conversion. For example, it is better to convert when asset values are low but expected to rebound in the near future, such as right after a market correction. Importantly, individual circumstances may exert pressure in opposition to the commonly shared factors described in this article.

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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