Strategic Reasons for Partial Roth Conversions Before Year-End

boomers boomerang kidsLooking for a tax-strategy for your investment portfolio? A Roth Conversion is something to consider.

Both IRAs and 401(k)s provide the opportunity to cultivate tax-free growth within your investment portfolio. While contributions to Roth retirement assets incur taxes, the potential for tax-free growth and withdrawals in retirement makes them a valuable addition.

It’s crucial to note that traditional retirement accounts contribute to taxable income in retirement when accessed for spending, creating a potential tax burden. Roth conversions offer a solution by introducing tax-exempt dollars into your balance sheet, reducing the income tax burden in retirement.

Here are four strategic reasons to consider a partial Roth conversion before the year-end:

  1. Capitalizing on Market Downturns: Many portfolios are still recovering from 2022 losses. A partial Roth conversion during a market downturn allows for a “discount” on the tax cost. Converting when the portfolio is down can reduce taxable income, providing a tax-saving advantage, especially for portfolios with nondeductible contributions.
  2. Future Tax Implications: Assessing future taxable income is crucial. If your future tax rate is expected to be higher than the current rate, partial Roth conversions can lead to tax savings. Over-investing in traditional retirement accounts may increase taxable income in retirement, offsetting today’s tax benefits.
  3. Anticipating Higher Taxes: With the potential for rising taxes, especially for higher-income individuals, having most wealth in tax-deferred accounts may impact after-tax wealth. Partial Roth conversions in the years leading up to expected tax increases can mitigate this impact by moving taxable income into lower brackets.
  4. Enhancing Tax Diversification: Achieving “tax diversification” involves managing taxable and investment income dynamically throughout retirement. Roth conversions contribute to this strategy by spreading wealth across tax-deferred, tax-exempt, and taxable accounts. This approach minimizes the risk of future tax rate increases affecting the value of retirement assets.
    To implement a partial Roth conversion for the current tax year, taking action by year-end is essential. Initiating the process promptly allows sufficient time for a comprehensive assessment of options.

This is something I cover in my Financial Planning services. To learn more, book a free consultation below.

Note: Consultation with financial and tax advisors, considering your family’s specific circumstances and objectives, is crucial in making informed decisions about Roth conversions.


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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
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