Subscribe
Share
Share
Embed
Freedom for Retirement™ is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
Welcome to the Freedom for Retirement Podcast. If you're a high earning professional, business owner, or someone approaching retirement and wondering whether you are truly on track, you are in the right place. This podcast is all about helping you make smart, confident financial decisions without the fear, confusion, or sales pressure that so often comes with money advice. Each episode is designed to break down complex topics like retirement planning, investing, taxes, and cash flow in plain English so you can understand what really matters and avoid the most common and costly financial mistakes. Everything you hear here is educational, fiduciary focused, and grounded in real world planning experience working with clients just like you.
Josh:I'm your host, Josh Duncan, partner at F5 Financial Planning. Let's get started. Are you wondering whether a Roth conversion could help you pay less in taxes during retirement? Or maybe you have heard someone say, you should convert your IRA to a Roth before tax rates go up. And now you are wondering if you are missing an important planning opportunity.
Josh:Roth conversions can be powerful, but they are also easy to misunderstand. A Roth conversion can create more tax flexibility, reduce future required minimum distributions, give you more control over retirement income, and potentially leave a more tax efficient inheritance. But here is the part that often gets skipped. A Roth conversion is not free. When you convert money from a traditional IRA or other pretax retirement account into a Roth IRA, you are choosing to pay taxes now instead of later.
Josh:That may be a smart move. It may also be an expensive mistake. The difference comes down to timing, tax rates, Medicare premiums, cash flow, and whether the strategy fits your broader financial plan. So the question is not simply, should I do a Roth conversion? The better question is, will a Roth conversion improve my after tax financial life over time?
Josh:I'm Josh Duncan, partner at F5 Financial Planning, where we take a fiduciary approach to maximizing our clients' wealth. In this video, we're going to walk through what a raw conversion is, why it can be useful when it can backfire, and the key questions to ask before converting. By the end, you should have a clearer way to decide whether a Roth conversion is a smart tax move or an expensive mistake. Let's start with the basics. A Roth conversion is when you move money from a pre tax retirement account, such as a traditional IRA into a Roth IRA.
Josh:In many cases, traditional IRA money has never been taxed. You may have received a deduction when you contributed, or the money may have grown tax deferred for many years. That is the benefit of a traditional retirement account. You delay taxes while the money remains invested. But there is a trade off.
Josh:When you eventually take money out, those withdrawals are usually taxable. A Roth IRA works differently. With a Roth IRA, you do not receive the same upfront tax deduction. But if the rules are met, future qualified withdrawals may be tax free. So when you do a Roth conversion, you were moving money from the tax me later bucket into the tax me now, but maybe not later bucket.
Josh:That is the core decision. You pay taxes on the converted amount today with the hope of creating tax free income, tax free growth, and more flexibility later. Suppose you have money in a traditional IRA and decide to convert part of it to a Roth IRA. The converted amount is typically added to your taxable income for that year. So, if you convert a meaningful amount, you need to be prepared for the tax bill.
Josh:This is where some people get caught off guard. They hear Roth IRA and think tax free, but the conversion itself is usually taxable. That does not make it bad. It just means you need to know what you're doing. A Roth conversion is not a magic tax loophole.
Josh:It is a planning decision. You are making a trade off between taxes today and taxes in the future. And whether that trade off makes sense depends on your situation. The main reason people consider Roth conversions is tax rate management. If your tax rate today is lower than you expect it to be in the future, a Roth conversion may be worth exploring.
Josh:You are choosing to pay taxes now at a potentially lower rate instead of waiting and paying taxes later at a higher rate. This can be especially relevant in the early years of retirement. For example, you may retire in your early sixties. Your paycheck stops. Social Security may not have started.
Josh:Required minimum distributions may still be several years away, and you may be living from cash savings or a taxable investment account. That window can sometimes create a lower income period, and lower income years can create tax planning opportunities. Instead of waiting until required minimum distributions force taxable income into your return, you may be able to convert some IRA money earlier and more intentionally. That can reduce the size of your traditional IRA over time, which may reduce future required distributions. It can also create more flexibility later in retirement.
Josh:Think about retirement income like a set of faucets. You may have a taxable account faucet, a traditional IRA faucet, a Roth IRA faucet. You may have Social Security. You may even have a pension. The more tax buckets you have, the more control you may have over where your income comes from each year.
Josh:That control can matter. Some years you may want to keep taxable income lower. Maybe you're managing Medicare premiums. Maybe you're trying to reduce the tax impact on Social Security. Maybe you need a larger withdrawal one year to buy a car, help family, take a special trip, or handle a home repair.
Josh:If every dollar has to come from a pre tax retirement account, that larger withdrawal may create a larger tax bill. But if some money is available in a Roth IRA, you have another option. Roth conversions can also play a role in estate planning. If you leave a traditional IRA to your heirs, they may owe income taxes when they withdraw the money. If you leave a Roth IRA, the tax treatment may be more favorable, assuming the rules are met.
Josh:That does not mean everyone should convert for heirs. You still have to ask whether it makes sense for you to pay the tax during your lifetime. But for families with significant pre tax retirement balances, Roth conversions may be part of a broader legacy strategy. The key idea is control. A Roth conversion may give you more control over future taxable income, retirement cash flow, lifetime taxes, and the way assets pass to heirs.
Josh:But control only helps when the strategy fits the plan. Now let's talk about the other side. Raw conversions can backfire. The first problem is converting too much in one year. Remember, the converted amount is added to your taxable income.
Josh:If you convert too much, you may push yourself into a higher tax bracket. That does not automatically make the conversion wrong, but it may make part of it less attractive. For example, converting a smaller amount might use available room in a lower tax bracket. Converting a much larger amount could push additional tax dollars into a higher tax bracket. That is why the amount matters.
Josh:A Roth conversion is not just a yes or no decision. It is also a how much decision. The second problem is Medicare. Many retirees are surprised to learn that higher income can increase Medicare Part B and Part D premiums through IRMAA. IRMAA stands for Income Related Monthly Adjustment Amount.
Josh:In plain English, it means higher income Medicare beneficiaries may pay more for Medicare. Medicare usually looks back at income from a prior tax year. So a large Roth conversion today could affect Medicare premiums later. This is not a reason to avoid Roth conversions altogether, but it is a reason to plan carefully. You do not want a surprise premium increase because a conversion pushed your income over a threshold.
Josh:The third problem is paying the tax from the IRA itself. Roth conversions are often more attractive when you can pay the tax bill from cash or taxable investments outside of the retirement account. If you withhold taxes from the IRA conversion, less money gets into the Roth. You may also create other complications if you are younger than retirement age and do not qualify for an exemption. The point is simple.
Josh:Before you convert, know exactly how the tax will be paid. The fourth problem is timing. Roth conversion often works best when the converted money has time to grow or when the conversion solves a future tax problem. If you convert money and spend it almost immediately, the benefit may be limited. There are also Roth distribution rules and waiting periods that need to be understood.
Josh:The fifth problem is looking at the conversion by itself. This is probably the biggest mistake. Someone looks at a IRA balance and says, I should convert some of this. But they do not look at Social Security, Medicare, charitable giving, estate planning, and cash flow. They do not look at pensions, capital gains, business income, home purchases, or other major events.
Josh:A Roth conversion that looks good in isolation may not look as good when you see the full picture. That's why fiduciary planning matters. The goal is not to sell someone on a Roth conversion. The goal is to decide whether the conversion improves the plan. So how do you know whether a Roth conversion may make sense?
Josh:Start with this question. Do you expect your tax rate to be higher or lower in the future? This is the heart of the decision. If you are in a relatively low tax year now, but you expect higher taxable income later, a conversion may be worth analyzing. Future income could come from required minimum distributions, social security, pensions, investment income, rental income, or a business sale.
Josh:But if you were in an unusually high income year, a Roth conversion may be less attractive. For example, if you just sold a business, received a large bonus, exercised stock options, or realized a major capital gain, voluntarily adding more taxable income may not be wise. Next, can you pay the tax bill from money outside the IRA? A Roth conversion means you are creating a tax bill. That bill may be handled through withholding, estimated payments, or a tax filing time.
Josh:But the money has to come from somewhere. If paying the tax creates cash flow stress, forces you to sell investments at a bad time, or weakens your emergency reserves, the conversion may be too aggressive. A good tax strategy should not create unnecessary financial stress. Next, will the conversion affect Medicare premiums? If you were on Medicare or close to Medicare age, this needs attention.
Josh:A Roth conversion can increase your modified adjusted gross income. That may affect future Medicare premiums. Sometimes paying higher premiums may still be worth it if the long term tax benefit is strong enough, but that should be an intentional trade off. Not an unpleasant surprise. Next, how long will the Roth money have to grow?
Josh:Time matters. The longer the money stays in the Roth IRA, the more valuable tax free growth may become. This is especially important if the Roth IRA is intended for later retirement years, a surviving spouse, or heirs. If you plan to spend the converted money soon, the benefit may be smaller. Next, how does this affect your spouse?
Josh:For married couples, Roth conversions can sometimes reduce the future tax burden on a surviving spouse. When one spouse passes away, the survivor may eventually file as a single taxpayer. That can create a higher tax burden on the same or similar income. If most retirement assets are in pretax accounts, the surviving spouse may face a difficult tax situation later. Strategic Roth conversions during the joint lifetime may create more flexibility.
Josh:That does not mean converting everything. It means modeling the situation carefully. Finally, does this support your estate plan? A traditional IRA and a Roth IRA can create very different tax outcomes for heirs. But this is not only about your heirs.
Josh:Your own retirement security comes first. It may not make sense to pay a large tax bill today just to make things easier for someone else later. The right answer depends on your values, resources, goals, and overall plan. The best way to think about Roth conversions is as a multiyear strategy, not a one time decision. Instead of asking, should I convert this year?
Josh:Ask what role should Roth conversions play over the next several years? That shift matters. A multiyear plan helps you compare tax brackets over time, coordinate conversions with Social Security, plan around required minimum distributions, account for Medicare premiums, and adjust when life or tax laws change. It also helps you avoid converting too much at once. For many retirees, the years right after retirement can be valuable.
Josh:Wages may have stopped. Social Security may not have started. Required minimum distributions may not have started. That does not mean you should automatically convert, but it may be a window worth analyzing. Another helpful approach is tax bracket management.
Josh:You may convert enough to use available room in a certain bracket, but not so much that you trigger unwanted consequences. The right amount depends on the facts. This is where tax projections, financial planning software, and coordination with a tax professional can be valuable. Roth conversion should also connect to your investment strategy. For example, if markets are temporarily down, converting may move assets into the Roth IRA at lower values.
Josh:If those assets recover inside the Roth, the future growth may receive favorable tax treatment if the rules are met. But be careful. Do not make tax decisions based only on short term market moves. The investment plan and tax plan should work together. Charitable giving is another factor.
Josh:If you were charitably inclined and have a large traditional IRA, future qualified charitable distributions may be useful once you reach the eligible age. That could change how much you wanna convert. For some donors, keeping money in a traditional IRA for future charitable giving may be more attractive than converting it all to Roth. Again, context matters. This is why blanket advice is dangerous.
Josh:Everyone should do a Roth conversion. It's too simplistic. The better approach is to compare scenarios. What happens if you do no conversions? What happens if you convert a modest amount each year?
Josh:What happens if you convert more aggressively? Then look at lifetime taxes, Medicare premiums, cash flow, estate planning, and flexibility. The goal is not to reduce taxes in one year. The goal is to improve the plan over your lifetime. Before we wrap up, here are a few common mistakes.
Josh:The first mistake is focusing only on today's tax bill. Nobody likes voluntarily paying taxes, so it can feel painful to do a Roth conversion and intentionally create taxable income. But the question is not whether the tax bill feels good today. It probably will not. The question is whether paying some tax today may help reduce a larger or less flexible tax problem later.
Josh:The second mistake is converting without a cash plan. Before converting, know how the tax bill will be paid. Know whether estimated payments are needed. Know whether you have enough liquidity. And know how the conversion affects the rest of your year.
Josh:The third mistake is ignoring Medicare. A conversion that looks good from an income tax perspective may look different once Medicare premiums are included. That does not mean the conversion is wrong. It means the full cost should be understood. The fourth mistake is treating Roth conversions as all or nothing.
Josh:You do not have to convert your entire IRA. For many people, smaller strategic conversions over multiple years may be better than one large conversion. The fifth mistake is leaving your tax professional out of the conversation. A financial planner can help model the strategy, but your tax professional should know what is happening. Tax planning works best when your adviser and tax preparer are aligned.
Josh:You do not want your tax preparer discovering a large Roth conversion after the year is over. So are Roth conversions a smart tax move or an expensive mistake? The answer is they can be either. A Roth conversion could be a smart tax move when you're in a lower tax year, can pay the tax from outside funds, want to reduce future required distributions, and need more flexibility in retirement. It can become an expensive mistake if you convert too much, ignore Medicare premiums, create cash flow stress, pay taxes at an unnecessarily high rate, or treat the strategy as a one size fits all advice.
Josh:The main takeaway is this. A Roth conversion is not really about the Roth account. It's about control. But that control only helps when the strategy is coordinated with the rest of your financial life. So before you do a Roth conversion, ask yourself, what tax rates am I paying today?
Josh:What tax rate might I face later? Can I afford the tax bill? Will this affect Medicare? How long will the money stay invested? How does this affect my spouse?
Josh:How does this fit into my estate plan? And most importantly, does this improve my plan after taxes, after costs, and after considering the trade offs? That is the fiduciary way to think about Roth conversions. Not as a product, not as a trend, not as something everyone should automatically do, but as a planning tool that should be used carefully, intentionally, and in the right circumstances. If you found this episode helpful, please consider subscribing to the podcast and leaving a review.
Josh:It helps more people find the show and continue learning how to make smarter financial decisions. I'm Josh Duncan, partnered F5 Financial Planning. If you would like to learn more about how we help our clients achieve financial freedom for personal significance, please visit our website at www.f5fp.com. Thanks for listening, and I'll see you in the next episode.