By Brent Matthew
Do you think of Roth conversions as something just for preretirement planning? That’s not always the case. I’ve found that many clients can reap considerable tax benefits from Roth conversions even after they’ve retired.
Roth conversions in retirement, especially in the early years, can limit your lifetime tax liability, reduce future required minimum distributions (RMDs), and offer improved financial stability.
Not convinced? Let’s take a closer look.
A Quick Overview of Roth Conversions
Many kinds of pre-tax retirement funds, including traditional IRAs and 401(k)s, have conversion features. This means you may be able to convert some or all of the funds in the account into a Roth IRA.
Roth IRAs are funded with post-tax dollars, so when you execute the conversion, you may owe income tax on the amount that you rolled into the Roth IRA. This means that a Roth conversion often leads to a hefty one-time tax bill. However, because distributions from Roth IRAs are tax-free, a conversion can save you thousands of dollars in taxes over time.
Why Consider Roth Conversions in Retirement?
A Roth conversion is a major retirement account transition, but there are many reasons why it might be worth it.
You Might Hit the Retirement “Sweet Spot”
Roth conversions are taxed as income. And depending on your tax bracket at the time of conversion, that tax bill may be significant. With strategic timing, though, you can limit your tax liability.
Many of my clients choose to do Roth conversions during the early-retirement “sweet spot.” This is the time after you’ve stopped working but before you have to start taking RMDs. If you’re like many people, your income is lower in these years. This means your Roth conversion is taxed at a lower rate.
Later on in retirement (when your income may be higher), you can withdraw funds from your Roth IRA without paying additional taxes.
You Can Reduce Future RMDs
Once you turn age 73 (or 75 if born in 1960 or later), RMDs kick in. If you have pre-tax retirement accounts, you’re required to withdraw a certain amount each year. That amount primarily depends on three factors:
- The account balance
- Your age
- Your and your beneficiaries’ life expectancies
RMDs are taxed as income. If you have a significant amount saved up for retirement, your RMDs could push you into a higher tax bracket, leaving you with less of your own money to spend.
By converting some of the funds in your pre-tax accounts to a Roth IRA now, you could reduce your RMDs, potentially lowering your tax bill.
You Can Diversify Your Retirement Portfolio
When your retirement portfolio includes assets in both pre-tax and Roth accounts, you can be more flexible in terms of withdrawals.
Here is an example. Imagine you have a medical emergency and need extra funds. However, taking that money from your 401(k) can push you into a higher tax bracket.
Fortunately, you also have funds in a Roth IRA. Because these are post-tax dollars, you can take a distribution without feeling the hit at tax time.
Thinking About a Roth Conversion?
Considering a Roth conversion? Any major decision involving your retirement savings can impact your life for decades to come. That’s why it’s often wise to get a second opinion.
At Scottsdale Wealth Advisory, our goal is for each of our clients to build a brighter financial future. We take the time to get to know you before helping you craft a custom financial plan.
Want to know how we can help? Contact us online today. To schedule your complimentary financial coaching session, call (480) 247-9090, email info@SWAFirm.com, or book directly at calendly.com/BrentMatthew.
Frequently Asked Questions About Roth Conversions
What is a Roth conversion and how does it work?
A Roth conversion is the process of moving money from a pre-tax retirement account, such as a traditional IRA or 401(k), into a Roth IRA. When you complete a Roth conversion, you pay income taxes on the amount converted in the year of the transfer. In exchange, future qualified withdrawals from the Roth IRA are tax-free, which can improve long-term tax efficiency in retirement.
Does a Roth conversion make sense after I retire?
It can. Many retirees experience a lower-income period between the time they stop working and when RMDs begin. This window may allow you to complete a Roth conversion at a lower tax rate. By strategically converting during these years, you may reduce future RMDs and create more tax flexibility later in retirement.
How do I know if a Roth conversion fits my retirement plan?
A Roth conversion depends on factors such as your current tax bracket, projected future income, estate planning goals, and available cash to pay the conversion taxes. Working with a fiduciary advisor can help you evaluate whether a Roth conversion supports your long-term retirement income strategy.
About Brent
Brent Matthew is the founder and CEO of Scottsdale Wealth Advisory, a full-service fiduciary retirement planning firm serving pre-retirees and retirees across Arizona and multiple states. With a strong commitment to always putting clients first, Brent leads the firm in developing comprehensive, tax-efficient financial plans tailored to each family’s unique goals. He is responsible for researching investment, annuity, and life insurance strategies and building smart asset allocations that reflect both long-term growth and risk management.
Brent is driven by a core belief: “The success of this firm will be measured by the success of the families it represents.” That client-first approach has guided his work since the beginning. He is currently enrolled at the College for Financial Planning and is on track to earn his CERTIFIED FINANCIAL PLANNER® designation. He also holds his Series 65 license and Arizona Life and Health Insurance Producers License.
Outside the office, Brent embraces the Arizona outdoors with “lil B” and their two pomskies, Heimo and Kota. Whether he’s hiking, fishing, dirt biking, skiing, golfing, kayaking, or skeet shooting, Brent finds balance and joy in staying active. He’s also a fan of CrossFit, brunching, and cruising the Phoenix canal system on his beach cruiser—usually with classic tunes from the Marshall Tucker Band, Gordon Lightfoot, or Crosby, Stills & Nash playing in the background. To learn more about Brent, connect with him on LinkedIn.
Advisory services are offered by Scottsdale Wealth Advisory, LLC, an Investment Advisor in the State of Arizona. Insurance products and services are offered through Scottsdale Wealth Advisory, LLC. Scottsdale Wealth Advisory, LLC is not affiliated with or endorsed by the Social Security Administration or any government agency, and is not engaged in the practice of law. Be sure to consult with a licensed financial professional to confirm the accuracy of the insurance product you are considering.
