Arlington Wealth

Does a Roth IRA Conversion Make Sense for Me?

While the taxman may appear to be heartless, he does offer some flexibility when it comes to taxing retirement savings:  You can pay me now, or pay me later when deciding if a Roth IRA Conversion strategy is likely to provide you, your family, and your heirs’ tax-related benefits down the road. 


Let’s start with some background. 

Traditional IRAs, subject to income limitations, are generally funded with pre-tax earnings.  Potential growth is tax-deferred, and future withdrawals, such as those used to support your living needs in retirement years, are typically taxed as ordinary income.  When you reach age 72, rules call for annual Required Minimum Distributions (RMDs) from your traditional IRAs, adding to your taxable income even if you do not need to withdraw the money for living needs.

Roth IRAs, on the other hand, are funded with after-tax money.  Potential growth is tax-free, subject to certain conditions, and future withdrawals are also tax-free.  Roth IRAs have no RMDs requirements.  Unlike Traditional IRAs, you never have to withdraw money from Roth IRAs unless you want or need the money.

A strategy many people are contemplating is to convert Traditional IRAs to Roth IRAs.  You can convert all or any portion of your Traditional IRAs.  The process itself is relatively straightforward – you transfer money or securities from a traditional IRA account to a Roth IRA account. 

The value converted is considered a taxable distribution and will increase your tax liability for the current year.  The potential benefit is to reduce taxes later in your life by reducing or eliminating your RMDs when tax rates may be higher.    Your heirs also can benefit.  They will inherit a Roth IRA tax-free; no taxes will be due when they withdraw the money from a Roth IRA.  

So, you can see that it is a case of pay me now or pay me later.  The question is – Should I do a Roth Conversion now, pay potentially lower taxes up-front, and then enjoy tax-free withdrawals down the road for myself and my heirs? 

As is often the case in life, the answer is, it depends.  Each family’s circumstances are different, and there is no one size fits all solution. 


  • Future Tax Rates:  The reason often cited for implementing a Roth Conversion strategy is the possibility of tax rate hikes in the coming years – it’s the difference between paying a known tax rate now versus paying unknown rates in future years.  While no one can predict future tax rates, there are a few factors to consider. The last time the Federal Debt was as high as a percent of GDP as it currently is, was at the end of World War II.  Following that period, the top individual tax rate rose above 90% until 1964 and remained above 70% until 1970.  Today we live in a relatively low tax environment with a maximum individual tax rate of 37%.  That could change with current tax proposals.  Higher future tax rates may make Roth Conversion strategies appealing. 
  • Reduce or Eliminate Future RMDs: Converting Traditional IRAs to Roth IRAs reduces or eliminates your future RMDs.  If you have sufficient income sources or assets to fund your lifestyle, then RMDs are unnecessary for your living needs.  Since RMDs increase your taxable income, reducing them can reduce the taxes you pay on other sources of income throughout your retirement years. As mentioned earlier, RMDs start at age 72 and continue for the rest of your life.  Therefore, reducing taxable income from RMDs can be significant tax savings for many years after age 72. An elite wealth manager can help you develop a Lifetime Cash Flow Plan to help you determine if RMDs are necessary for your situation.
  • Tax-Free Growth: After you convert funds to a Roth IRA, the assets can potentially grow tax-free.  The converted assets and growth can be withdrawn tax-free for your needs later in life.  In many cases, much of the Roth IRA value will pass to your heirs.  They will benefit from a tax-free inheritance. 
  • A Roth Conversion Could Push you into a Higher Tax Bracket: To avoid surprises with your tax liability in the year you perform a Roth Conversion, you should understand how much capacity you have in your current tax bracket and your comfort level for paying a higher rate on income above that threshold.  One strategy is to execute Roth Conversions over several years to manage the up-front tax burden.    
  • Medicare surcharge: Medicare Part B premiums could increase if a Roth Conversion increases your Modified Adjusted Gross Income (MAGI) above certain levels.  Your Medicare premium is based upon your tax filing from two years ago, so a Roth Conversion this year could increase your Medicare premiums two years down the road.  Conversions could also impact your Medicare Part D (prescription drug coverage) premiums, so be sure to work with a professional who understands these nuances.  Any increase in Medicare premiums from Roth Conversions is most likely temporary.  However, by reducing RMDs in future years, your MAGI may be lower later in life, reducing Medicare premiums at that time.


There are many moving parts to forecasting a family’s tax obligation with or without Roth Conversions.  Some wealth managers use tax planning software that includes various inputs for your family’s situation to run what-if analysis on different Roth Conversion scenarios.  Lifetime Cash Flow Planning helps you forecast potential tax obligations in future years and compare them to performing Roth.  Armed with this data, families can make informed decisions about whether Roth Conversions may benefit them. 


If one of your financial objectives is to leave a legacy to your children or grandchildren, some planning now might make their inheritance more impactful.  When your adult child inherits a Traditional IRA or Roth IRA, they must withdraw all assets from the account within ten years.  Distributions from inherited Roth IRAs are tax-free; however, distributions from inherited Traditional IRAs are taxable.  Furthermore, suppose your child inherits a Traditional IRA at a time they are already in a high tax bracket. In that case, the additional taxable income from mandatory IRA distributions will be taxed at high rates or may push them into even higher tax brackets.  Your heirs may appreciate proactive planning in passing assets in Roth IRAs rather than Traditional IRAs! 

There are many moving parts when analyzing if a Roth Conversion is proper for you.  Be sure to work with a professional who can help you forecast tax implications under various scenarios.  A Roth Conversion strategy could be of great benefit for some people, while for others, no action may be the best course of action. 


The information included in this material is for informational purposes only and should not be relied upon for any financial or legal purposes. Arlington Capital Management Inc, dba Arlington Wealth Management (AWM) is an investment adviser registered with the U.S. Securities and Exchange Commission.  Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training, nor are we selling you any product.  Rather, we are seeking to provide you with advisory services.   Please consult with your own tax and legal advisers before investing. AWM cannot and does not guarantee the performance of any investment.  Past performance is no guarantee of future results.

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