Mon - Fri : 9:00 AM - 5:00 PM
support@pharrcpa.com
850-435-8844

3 Strategies for Reducing Roth Conversion Taxes

How to make the most of a Roth IRA conversion.

3 Strategies for Reducing Roth Conversion Taxes 

//
Posted By
/
Comment0
/
Categories

How to make the most of a Roth IRA conversion. 

A Roth IRA conversion may be right for you if you have a year where either your taxable income is lower than normal or your income is too high to contribute to a Roth  

($161,000 and up for individuals or $240,000 and up for married couples filing jointly in 2024). With a Roth conversion strategy, you convert all or part of your traditional IRA to a Roth IRA and pay regular income taxes on the converted amount. 

Why convert to a Roth IRA? 

It may seem counterintuitive to pay taxes now instead of later when you start taking required minimum distributions (RMDs), but doing so will allow you to take advantage of a Roth IRA’s main features: tax-free withdrawals of contributions and earnings in retirement—so long as you’re 59½ or older and have held the account for at least five years. (If you’re younger than 59½, you can withdraw Roth IRA contributions anytime tax- and penalty-free, but you may pay taxes and penalties on earnings depending on how long you’ve held the account and how you’re using the money.) 

A Roth IRA is an attractive option for individuals who believe their tax rate may be higher in retirement, or for those who just want the flexibility that tax-free income provides. And, unlike tax-deferred retirement accounts, Roth IRAs aren’t subject to RMDs beginning at age 73. 

Tax-smart strategies for a Roth IRA conversion 

If you think a Roth IRA conversion might be right for you, here are three tax-efficient strategies to consider: 

  1. Max out your bracket: Let’s say you’re single and make $150,000 a year, which puts you in the 24% tax bracket. The next bracket doesn’t kick in until your income exceeds $191,950, so you could convert up to $41,950 ($191,950 – $150,000) and still stay within your current bracket. 
  1. Spread it out: Breaking up the conversion across multiple years can make the tax hit easier to manage—and could, when combined with the strategy above, reduce the overall tax you pay on the conversion. 
  1. Get ahead of tax changes: If upcoming changes to tax law will adversely affect future taxes, converting some or all your traditional IRA in the year preceding the change could help you avoid paying more tax on the conversion than necessary. 

Bottom line 

In any case, you may want to wait until the end of the year to perform a Roth IRA conversion to account for any and all changes to your total taxable income. Or work with a tax professional who can help project your total taxable income for the year and create a plan to max out your tax bracket with conversions and potentially minimize your tax obligations—annually and over time. 

Leave a Reply