By Justin Simmons
Many types of retirement plans are tax-deferred. However, there are some instances where it may be better to pay tax on retirement savings now. Roth conversions allow you to convert a traditional IRA into a Roth IRA. That means you can enjoy tax-free withdrawals and avoid the hassle of required minimum distributions (RMDs), as long as qualifying conditions are met.
Should your financial plan include Roth conversions this year? That depends on a few different factors. Here’s a closer look.
What Are Roth Conversions?
A Roth conversion is when you roll over funds in your traditional IRA into a Roth IRA. You must pay income tax on the rolled-over funds, but once you reach age 59½ and have owned the account for at least five years, withdrawals aren’t taxed. Because you already paid income tax on the funds in your Roth IRA, you won’t be required to take minimum distributions in the future.
You might wonder why you wouldn’t just open and fund a Roth IRA yourself. In some cases, you can. However, the IRS limits the amount you may contribute annually based on your income. For 2025, you may not contribute directly to a Roth IRA if your modified adjusted gross income (MAGI) meets or exceeds these thresholds:
- Single/Head of Household: $165,000
- Married Filing Jointly: $246,000
If you make too much to contribute directly, Roth conversions are a perfectly legal workaround. You may convert all or part of your traditional IRA balance into a Roth IRA.
When Should You Consider Roth Conversions?
It’s always best to check in with your financial advisor before deciding for or against Roth conversions. However, this might be a good strategy for you if any of the following apply:
You Want to Leave More for Beneficiaries
If you think you’ll need to use all or most of your IRA to fund your retirement, this may not be a concern. However, if you don’t anticipate needing to use all of your retirement savings, converting your traditional IRA to a Roth may allow you to preserve more wealth for your heirs. Your account won’t be depleted by RMDs, and in most cases, your heirs can withdraw funds tax-free.
You’re in a Lower Tax Bracket This Year
When you roll your traditional IRA into a Roth IRA, the funds are subject to income tax. If your income varies from year to year and this is a slower year, doing Roth conversions now could save you a significant amount in taxes.
Your Retirement Accounts Are All Tax-Deferred
Diversification is important with any kind of investment. If all your retirement accounts currently have the same tax treatment, Roth conversions may give you more options for future tax planning.
You Think Your Tax Bracket Might Be Higher in Retirement
Paying income tax on a significant portion of your retirement savings now may seem unpleasant. However, if you think you may end up in a higher tax bracket when you’re retired, you could save thousands by converting a Roth IRA now instead of later.
Thinking About Roth Conversions?
Like any other retirement savings strategy, Roth conversions don’t exist in a vacuum. Before deciding whether this strategy is right for you, it’s important to consider it in the context of your broader retirement plan (and your financial plan as a whole).
At Beck Capital Management LLC, we build customized investment portfolios and financial plans for our clients. Your goals aren’t cookie-cutter, and your financial plan shouldn’t be either. If you have questions or think we may be the firm for you, contact us to schedule your initial consultation.
To schedule a meeting, call (512) 345-6789 or email information@beckcapitalmanagement.com.
Frequently Asked Questions
Q: What are the benefits of a Roth IRA conversion for high-net-worth individuals?
A: A Roth conversion serves as a permanent hedge against future tax rate hikes by moving assets from a “tax-deferred” to a “tax-free” environment. For high-net-worth individuals, the primary advantages include:
- Elimination of RMDs: Unlike Traditional IRAs, Roth IRAs do not require Required Minimum Distributions (RMDs) during the owner’s lifetime, allowing for longer compounding.
- Tax-Free Inheritance: Under current “10-year rule” beneficiary laws, heirs can inherit a Roth IRA and grow the assets tax-free for a decade.
- Lower Medicare Premiums: Roth withdrawals do not count toward the MAGI thresholds that trigger IRMAA surcharges on Medicare premiums.
By converting pre-tax dollars into Roth assets, investors create a flexible “tax bucket” to pull from in retirement, a core planning strategy utilized by Beck Capital Management in Austin.
Q: When should a Roth conversion be considered in a financial strategy?
A: The optimal window for a Roth conversion is typically a “low-income gap year”—such as the period between early retirement and the start of Social Security or RMDs (currently age 73 or 75). It should also be considered when:
- Market Volatility Occurs: Converting during a market dip allows you to pay taxes on a lower asset valuation, “buying” more shares for the Roth account at a discount.
- Brackets are Filling: Strategically “filling up” your current tax bracket (e.g., the 22% or 24% bracket) before the next tier kicks in.
- Mandatory Catch-ups: Since 2026 rules require high-earners (FICA wages over $145k) to make catch-up contributions on a Roth basis, many choose to coordinate these with larger conversions.
Pinpointing these opportunistic windows is a key part of the fiduciary oversight at Beck Capital Management in Austin.
Q: What are the potential risks of a Roth conversion?
A: The primary risk is the immediate tax liability, as the converted amount is treated as ordinary income in the year of the transfer. This can lead to several “stealth taxes,” including:
- Bracket Creep: The conversion could inadvertently push you into a higher marginal tax bracket or phase out certain deductions.
- The 5-Year Rule: Converted funds must generally stay in the account for five years to avoid a 10% penalty on withdrawals if you are under 59½.
- No Recharacterization: Under current law, once you convert to a Roth, you cannot “undo” it if your financial situation changes.
Mitigating these risks requires precise multi-year tax projections to ensure the long-term tax savings outweigh the upfront cost, a specialized process led by Beck Capital Management in Austin.
About Justin
Justin Simmons has been a licensed Investment Advisor since 2007. Prior to entering the investment field, Justin earned his Bachelor’s degree in Business Administration from the University of Texas at Austin in December of 2005.
While in college, he was an All-American pitcher for the Longhorn baseball team and helped lead them to the 2002 National Championship. Drafted by the Los Angeles Dodgers in 2004, Justin pitched for the LA Dodgers organization for three seasons before returning to Austin to pursue a career in finance.
Always looking to give back to the community, Justin currently volunteers on a regular basis with RBI Austin, where he has also served on the Board of Directors since 2013.
Justin lives in Austin with his wife Jennifer and enjoys all forms of physical fitness, teaching youth baseball, and hunting.
Disclosures:
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions.
Any investments or strategies referenced herein do not take into account the investment objectives, financial situation, or particular needs of any specific person. Product suitability must be independently determined for each individual investor.
Neither asset allocation nor diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.
Beck Capital Management does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
A Roth distribution is qualified if you’ve had the account for at least five years and/or the distribution is made after you’ve reached age 59½, because of your total and permanent disability, in the event of your death, or for first-time homebuyer expenses. Distributions made prior to age 59½ may be subject to a federal income tax penalty.
Determining when or if you should convert to a Roth IRA is an individual decision based on factors such as your financial situation, age, tax bracket, current assets, and alternate sources of retirement income. Your unique circumstances help determine what is appropriate for you. If converting a traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional IRA contributions and on all earnings. It is recommended that you discuss tax issues with a qualified tax advisor.