Here are 3 things to consider before making a Roth conversion to save on future taxes


Experts say that there are a few things to consider first. Experts say that you should plan for the upfront tax bill. 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

Typically, a partial or full Roth conversion is more attractive in lower-earning years because there could be a smaller upfront tax liability. Experts say that some investors might want to lock-in lower tax rates before they expire. These rates will return in 2026 if Congress does not make any changes.

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.

You’ll also need to consider the “five-year rule,” which requires investors to wait five years before withdrawing converted balances without incurring a 10% penalty. The timeline begins Jan. 1 on the year of the conversion.

Overall, there are several factors to assess and “the timing of the conversion can significantly impact its financial outcomes,” Lawrence added.