Who Is the Ideal Candidate for a Roth Conversion?
In our latest video, Daniel Andersen, CFP®, and Trevor Stone, CFP®, EA, advisors with Parkshore Wealth Management, paint a picture of what an ideal Roth conversion candidate looks like and why the answer is not the same for everyone. Watch the video below, or keep reading for the highlights.
A Roth conversion moves money from a traditional 401(k) or IRA, where withdrawals are taxed as income, into a Roth IRA, where qualified withdrawals are not. The trade-off is that you owe tax on the amount you convert in the year you convert it. Whether that trade-off is worthwhile depends heavily on your personal financial picture. Here is what Dan and Trevor look for.
Ideally, Before Age 65
Converting before you are eligible for Medicare helps remove a major complication: The added income from a conversion is less likely to affect eligibility for healthcare subsidies. If you have retiree healthcare coverage through a former employer instead of relying on the marketplace, this concern may not apply to you in the same way.
No Pension in the Picture
Retirement income tends to look different for people without a pension. Once wages stop, their taxable income can drop, creating room to convert assets at a lower tax rate. For those with a pension, that steady income keeps taxable income from falling as far, which leaves less room to convert without pushing into a higher bracket.
A “Compressed” Income Year
Social Security, pension income, a side business, or rental income can all stack on top of the income created by a Roth conversion. The strongest candidates tend to be people whose overall taxable income is low in the year they convert, since a conversion added on top of several other income sources is more likely to be taxed at a higher rate.
It Does Not Have to Happen Every Year
A Roth conversion is not an all-or-nothing, every-year decision. Some years may be better suited to realizing capital gains, while others create a better window for converting, depending on your income and goals for that year. Identifying which tool fits a given year is part of the planning process.
Where to Start
A Roth conversion creates a tax bill in the year it happens, so it is not the right move for everyone or every year. Whether it makes sense for you depends on your age, income sources, and broader financial and tax picture. This is something we help clients evaluate: whether a conversion fits their situation and, if so, when.
If you or someone you know is curious whether now is an opportune window for a Roth conversion, we would welcome the opportunity to talk it through. Schedule a consultation to get started.
This material was written in collaboration with artificial intelligence (Claude) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is an independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Daniel Andersen, CFP®, a member of NAPFA, the country's leading professional association of fee-only financial advisors.