A big part of managing your money – particularly in retirement – is keeping it as tax efficient as possible. That means taking advantage of several strategies that the IRS allows to lower or even eliminate taxes on asset growth. One such strategy is the use of a Roth IRA. Even when you don’t have a long history of contributing to a Roth IRA. 

Monies in a Roth IRA are ‘after tax’. You earn it, pay taxes on it, then contribute to the Roth. The great advantage comes with time. Any growth in that account after the initial contribution is withdrawn tax free. The longer you stay invested in a Roth, the more your money grows tax free. 

Is a Roth conversion right for you? That depends upon your financial situation. The longer the time horizon before you need to take monies from the account, the greater your potential tax savings. Your CFP pro can help you determine your savings. Or plug some numbers into an online Roth conversion calculator to learn your tax savings. Conversion is often a strategy also used to eliminate taxes for heirs as a legacy. 

Monies can only be converted to a Roth if they are already in a tax-protected account like a traditional IRA. When moving money from a traditional IRA to a Roth, you’ll need to pay ordinary income tax on that money. So, if you’re converting a large amount – it’s often advisable to convert over several years, not all at once. 

When you reach 73, you’ll need to begin required minimum distributions (RMDs) from your before-tax retirement accounts. The IRS determines how much you’re required to take out as you age. If you have a sizeable amount in retirement accounts – your RMD alone could push you into a higher tax bracket – so converting between the time that you leave your job and when you collect Social Security may benefit you over time.

Bottom line – if you have very high income and a shorter time- horizon, it may not pay to convert.