Here are 3 things to consider before making a Roth conversion


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As year-end approaches, some investors may be weighing a Roth individual retirement account conversion to save on future taxes. But there are several things to consider first, experts say.

The strategy transfers your pretax or nondeductible IRA funds to a Roth IRA, which kick-starts future tax-free growth. But you have to plan for the upfront tax bill.

“Making a Roth conversion is a significant financial decision that carries both short-term and long-term implications,” said certified financial planner Ashton Lawrence, director at Mariner Wealth Advisors in Greenville, South Carolina.

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Here are some key factors to consider before making a Roth conversion, according to financial experts.

1. Assess the short-term tax consequences

While a Roth conversion may offer long-term tax benefits, there’s potential for shorter-term consequences, Lawrence warned.

Depending on the size of the conversion, you could have a hefty upfront federal and state tax bill, which could deplete savings or trigger IRS penalties without proper planning, he said.

Plus, boosting your adjusted gross income can create other issues, such as higher Medicare Part B and Part D premiums, or losing eligibility for other tax breaks.

2. Consider current and future tax brackets

“Roth conversions are a tax arbitrage,” so it’s critical to weigh your current and future tax brackets, said CFP Jeremy Finger, founder and CEO of Riverbend Wealth Management in Myrtle Beach, South Carolina.

Roth conversions are a tax arbitrage.

Jeremy Finger

Founder and CEO of Riverbend Wealth Management

3. Weigh the timing

“Timing is another crucial factor,” said Lawrence. Typically, a longer investing timeline is beneficial because there’s more time for tax-free growth to offset the upfront cost of the conversion.

You can run a projection with a financial or tax advisor to find out the break-even period before deciding whether to convert the funds.

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