Roth Conversions Strategies

Slide 1: Roth Conversions: The Tax-Wise Choice

 I want to start by briefly reviewing two of the most common retirement accounts you probably have: a Traditional IRA and a Roth IRA. Think of it this way: with a Traditional IRA, you get a tax deduction now, but you'll pay taxes on your withdrawals in the future. We call this 'pay taxes later.' With a Roth IRA, you pay taxes on the money now, but all of your withdrawals in retirement are completely tax-free. We call this 'pay taxes now.'

Slide 2: What is a Roth Conversion

A Roth conversion is simply the process of moving money from your 'pay taxes later' bucket—your Traditional IRA—into your 'pay taxes now' bucket—your Roth IRA. The price of admission to this tax-free world is that you must pay income tax on the amount you convert in the year you make the conversion. It’s a strategic move to lock in your tax rate now rather than later.

Slide 3:  Traditional vs. Roth: Setting the Foundation

So, why would a retiree consider doing a Roth conversion? The benefits are a major reason why this strategy is so appealing. A Roth IRA has no Required Minimum Distributions, or RMDs, for the original owner. This is a huge benefit because it gives you complete control over when and how much you withdraw.

Slide 4: Four Reasons to Convert

1. No RMDs. 

2 The money in your Roth IRA grows and can be withdrawn completely tax-free. It will never be taxed again. 

3 a Roth conversion is a powerful hedge against rising tax rates. If you believe tax rates will be higher in the future, it makes sense to pay the tax at today's potentially lower rate. 

4  a Roth IRA is an excellent legacy tool. Inherited Roth IRAs are tax-free for your heirs, which makes them a powerful way to leave a tax-free gift to your beneficiaries.

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Slide 5: Is a Conversion Right for You?

A Roth conversion isn't for everyone, and it's a decision that requires careful thought. You should ask yourself three key questions.

First, do you have the cash outside of your IRA to pay the tax bill? You never want to use the money you're converting to pay the tax. This would defeat key advantages of doing the conversion.

Second, are you in a low-income year? Perhaps you just retired, or you're a few years away from starting your Social Security benefits. A low-income year is a prime opportunity to convert at a low tax rate.

Third, do you expect to be in a higher tax bracket later in retirement? This could be due to large RMDs or other sources of income. If so, a Roth conversion might be an excellent move. 

If you agree with these three items then the Roth conversion may be for you.   Please note that Roth conversions strategies can be complicated therefor if needed seek professional help.

Slide 6 Two issues you must be aware of:

Two issues you must be aware of:

1. IRMAA Risk (Income-Related Monthly Adjustment Amount)

2. Conversion Tax (The Roth conversion is an immediate taxable event)

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Slide 7: Doing Roth Conversions after age 65

If you are currently enrolled in Medicare, you must be aware of the Income-Related Monthly Adjustment Amount, or IRMAA. IRMAA is an additional premium surcharge that Medicare adds to your Part B and Part D costs if your income exceeds certain federal thresholds. This is critical because doing a Roth conversion will increase your reported income for the year the conversion occurs, potentially pushing your Modified Adjusted Gross Income (MAGI) over the threshold and triggering that costly IRMAA surcharge two years later.

Slide 8 Beware of IRMAA when doing Roth Conversions

Give an example of a married couple filing jointly having an income of $200,000. 

(to the part B and D amounts on the screen) minimum amount

What will happen this they do a $25,000 roth conversion.  There AGI income will now be $225,000, thus pushing them over the cliff into the next IRMAA bracket.  (go over the new numbers)

Please note that the IRMAA you pay in 2025 is based on your 2023 MAGI income.

More info on IRMAA will be presented in lesson 7

Slide 9: How to avoid/reduce IRMAA surcharges?

All the pieces of our financial planning course now start to fit together.  It is important to realize the importance of tax planning and IRMAA planning when doing Roth conversions.  IRMAA will be discussed in more detailed in the Medicare lesson which is lesson 7.

In addition to be aware of IRMAA when doing Roth conversions when you are over 65.  There is another major topic that will need your attention and that will be paying taxes on the conversions.

Slide 10 -  What about taxes on the conversions?

Remember, a Roth conversion is essentially like getting a massive bonus: the full converted amount is added to your income and taxed as ordinary income. The tax is due in the same year as the conversion. 

If your regular paycheck or income withholding doesn't cover this large spike, you will face an underpayment penalty.

 The IRS is pay-as-you-go, and they penalize underpaying

Slide 11 Roth Conversion Pay Tax Practices

There are three key planning takeaways. 

One: Pay the tax separately. You must use cash from a regular bank or brokerage account to pay the conversion tax. Do not pay it from the IRA itself, or you'll lose a portion of that tax-free growth, and you may even trigger an additional penalty if you’re under 59 1/2"

Two: You may need to play estimated payments. Calculate the tax and send it in using the quarterly Form 1040-ES or use pay using the IRS online tax payment feature.

 Aligns your payment with the conversion income. For example, if I am in the 22% tax bracket, filing jointly, and I make a $40,000 Roth conversion, I should pay 22% of that $40,000 in estimated taxes the quarter that I execute the conversion.

And Three: If you convert late in the year, be proactive. The IRS assumes income is earned evenly. If you do a big conversion in December, you may need to file Form 2210, Schedule AI, to prove the income was not earned evenly, preventing a penalty on your earlier tax quarters.  You may need to go to a tax preparer to help you with this form.

Your tax preparation software should help you when preparing your taxes. However, the first time you do a Roth conversion, it may be good to get some professional advice.

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