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Tyler MorrisJuly, 20246 min read

Enhancing Your Retirement Savings with Roth Conversions

Enhancing Your Retirement Savings with Roth Conversions

Roth Conversions

Roth IRAs are known for their tax-free growth and withdrawals, however, high earners and retirees regularly overlook these dream savings accounts because they have income limits that, on the surface, prevent them from participating. At Stratos Private Wealth (SPW), we think that Roth conversions are an effective, alternative way to save money in a Roth IRA, not subject to IRS limits. With the right planning and a little foresight, Roth conversions can help people maximize their retirement savings and save money on taxes over the course of their lifetime.

What is the Difference Between a Roth IRA and a Traditional IRA?

Roth IRA money is taxed on the way in, the money then grows tax-free and is withdrawn tax-free in retirement. Conversely, traditional IRA money is taxed on the way out. Investors make pretax contributions, the money grows tax-deferred, and taxes are paid when the money is withdrawn.

key differentiator between Roth IRAs and Traditional IRAs is that Roth IRAs have income limits on contributions. In 2024, any household with an adjusted gross income (AGI) greater than $240,000 (filing jointly) or $161,000 (filing single) cannot contribute directly to a Roth IRA. That said, continue to consider Roth IRAs if your income exceeds these limits because a Roth conversion may still be a viable option.

What is a Roth Conversion?

A Roth conversion is the process of converting funds from a traditional IRA to a Roth IRA. Income taxes will be due on the amount converted in a given tax year.

When Should you Convert to a Roth IRA?

Roth conversions allow you to reap the benefits unique to Roth IRAs, regardless of your income. Two notable benefits are 1. tax-free withdrawals and 2. the absence of required minimum distributions (RMDs), which refer to a certain amount of money investors typically must take from their traditional IRAs each year once they turn age 72:

1. Roth conversions allow you to pay taxes now instead of later

If you anticipate that your income-tax rate will be greater in future years than it is today, converting funds to Roth may save you money on taxes in the long run. Everyone’s situation is different, so be sure to consult with your CPA. But in certain cases, this strategy makes sense. For example, take a recently retired individual who is not yet taking RMDs. It’s possible that their current income-tax rate is low relative to when they were working, and relative to when their RMDs begin. Therefore, it could be wise to do a Roth conversion today and pay taxes at comparatively lower rates. Tax years are “use it or lose it,” so don’t let low tax years go to waste. Other good candidates for Roth conversions are young, high-income earners who make too much money to contribute to a Roth IRA directly, but who expect to earn even more money in future years. It might make sense for them to pay taxes on converted money at their current marginal rate. They could make nondeductible contributions to a traditional IRA, and immediately convert those funds to a Roth. Sophisticated readers will point out that if you’re unable to contribute to a Roth IRA, you probably cannot deduct traditional IRA contributions either, because those deductions also go away above similar income limits. Even without the deductibility of IRA contributions, Roth conversions can still be worth it for high earners.

At Stratos Private Wealth, we work closely with our clients and their CPAs to try and “smooth out” client marginal tax rates in retirement. One strategy mirrors a “Price-Is-Right” approach—try to fill up your current income-tax bracket via a Roth conversion without bumping yourself into the next bracket. SPW can help you estimate these amounts with our planning software and can work directly with your CPA to help you determine the targeted amount to convert each year.

2. Roth conversions can help mitigate Required Minimum Distributions

Roth IRAs are also estate-planning tools because they do not have RMDs. Aptly named, RMDs are mandatory, and they can force wealthy investors to draw down their traditional IRA assets even when they do not need the money. If your income demand in retirement is less than your RMD, a Roth conversion could help you avoid any unwanted withdrawals. When converting funds to a Roth, it is important to carefully consider the tax implications and discuss the strategy with your tax advisor ahead of time. Ideally, you are looking to balance the taxes paid today as a result of the conversion versus your long-term tax savings down the line.

Other Considerations for Roth Conversions

  • Down-Market Years 

    Roth conversions become even more compelling in down-market years because the tax bills from conversions may be lower than what they would be in more robust market conditions. Furthermore, when the market eventually rallies, you will accrue growth in a Roth account with tax-free withdrawals, instead of amassing growth in a traditional IRA where withdrawals are eventually taxed as income.
  • SECURE Act 

    The SECURE Act became law on January 1, 2020 and tightened the rules on inherited retirement accounts. Previously, if you inherited an IRA, you could “stretch” your withdrawals over the course of your life expectancy. Now, when you inherit an IRA, all funds must be withdrawn within 10 years of acceding the account, with a few exceptions. If you do not want to burden your heirs with a large tax bill, consider converting funds to a Roth so tax payments are made during your lifetime instead of theirs.
  • Taxes 

    Roth conversion can provide “insurance” against future tax increases. In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), cutting income-tax rates to decade lows. Converting money now may be a tax hedge if tax rates do increase in the future.

Are There any Common Pitfalls With Roth Conversions?

Roth IRAs are subject to the five-year rule, which states that Roth accounts must be open for five years before qualified distributions can be made, otherwise, you may have to pay taxes on growth and/or face a 10% early-withdrawal penalty. Roth conversions have separate five-year clocks that start the year of the conversion. Roth conversions may add unnecessary complexity to situations where funds might be needed within five years.

Two Different Scenarios, Same Roth Conversion

Whether you are working or retired, a Roth conversion ought to be seriously considered, especially if you think your taxable income will grow over time. In certain situations where a client will be in a higher tax bracket in the future, Roth conversions can lower the amounts of tax paid in an individuals lifetime by paying tax sooner but in a lower bracket. If you think a Roth conversion may make sense for you, feel free to reach out to our team, and we’d be happy to review your options. 

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Stratos Private Wealth is a division through which Stratos Wealth Partners, Ltd. markets its wealth management services. Stratos Wealth Partners, Ltd. is a registered investment advisor. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing involves risks including possible loss of principal. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The above illustration is based on various assumptions and is therefore hypothetical in nature and are for informational purposes only. You should consult your tax and/or legal advisors before implementing any transactions and/or strategies concerning your finances.


Tyler Morris

Tyler Morris is a Founding Partner and Wealth Advisor at Stratos Private Wealth