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When Roth Conversions Make No Sense
While Roths have their benefits , sometimes switching is a bad idea .
By Ben Mattlin
THE BENEFITS OF ROTH IRAS ARE UNdeniable . Their earnings and withdrawals come tax-free . You don ’ t have to take any required minimum distributions on them . Still , advisors warn , converting your regular IRA to a Roth isn ’ t always prudent . In certain circumstances it can even be a bad idea .
For instance , it ’ s never a good idea to recommend that your client convert to a Roth IRA unless you completely understand their current tax situation and long-term goals , says Ryan McKeown , a CPA and advisor at Wealth Enhancement Group in Mankato , Minn .
First you should compare the client ’ s current expected tax rate and the one you expect in the future , he says . Unlike traditional IRAs and 401 ( k ) s , Roths don ’ t help you lower your taxes in the current year — if your clients convert now from a traditional IRA , they ’ ll have taxes come due . Instead , the Roth money comes out tax-free later when they are making withdrawals , something distributions from traditional IRAs and 401 ( k ) s don ’ t allow .
That means Roth conversions are usually best done in years when taxable income is “ appreciably lower than what a taxpayer expects it to be in the future ,” says Isaac Bradley , director of financial planning at Homrich Berg in Atlanta . “ With a Roth conversion , you are paying tax today to avoid paying tax in the future .”
It ’ s impossible to be completely sure about future tax rates , he says . They ’ re currently up in the air while Congress debates the fate of the Tax Cuts and Jobs Act of 2017 . That law reduced tax brackets for many individuals , but those provisions expire at the end of 2025 , which means taxes increase in 2026 unless the law is renewed — or Congress enacts some other tax-reduction measure . Of course , the victory of Donald Trump in the 2024 presidential election has made either one of those outcomes more likely .
Nevertheless , a client ’ s future rates could increase for different reasons . What if they inherit money , sell a property or see some tax deduction go away ? It ’ s also likely they could get a bump up in taxes during retirement , Bradley says , because of the minimum amounts they must withdraw from their traditional IRAs and 401 ( k ) s every year after they turn 73 ( the threshold age will increase to 75 in 2033 ).
Those distributions are taxable and add to an account holder ’ s adjusted gross income , which means your clients can get caught in higher tax brackets and also see higher Medicare surcharg-
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