Hello and welcome to today’s episode of Street$marts with Howe & Rusling. I’m Vince Carson, Certified Public Accountant and Financial Planner at Howe and Rusling. In today’s episode, we are going to take a deep dive into one of the best tax planning strategies out there: Roth conversions… and why this year, through 2025, is an opportune time to consider implementing them. Also, we are going to describe the ideal investor profile who would be best positioned to implement a Roth conversion strategy.
To begin, let’s briefly review what a Roth conversion is. A Roth conversion is simply the process of repositioning Traditional IRA assets into Roth IRA assets. In other words, you’re taking a portion of your tax deferred assets and electing to pay the income tax on those funds, in order to convert them to tax-free assets. For a much deeper explanation surrounding the mechanics of Roth conversions, you can find a couple of prior Street$marts episodes that cover Roth IRAs and conversions in depth.
So, the first question you might ask is: “Why would anyone want to pre-pay their income tax?” And the answer has to do with one of the biggest advantages of currently making Roth conversions. Essentially, we know that the tax rates, which are currently in effect, are going to increase come 2026. And if we know that our marginal tax rates will be increasing in a few years, why would you not want to take advantage of those tax rates being lower? For example, if you’re currently in the 22% marginal tax bracket, come 2026, your marginal tax rate is expected to be bumped up to 25%. That 3% difference is huge!
Other than capitalizing on the low tax rate environment, what’s another important reason why someone would want to implement a Roth conversion strategy? Particularly right now? Well, as we all know, this year hasn’t been great for the stock market. Most growth-oriented portfolios are down anywhere from 15%-20%. When the market turns around, any amounts that were converted to Roth assets will recover and then grow tax free.
Now, let’s touch base on the profile of an investor that would be best positioned to maximize a Roth conversion strategy.
- Folks in a low income tax bracket. My thoughts immediately go to those people in early retirement who are no longer earning a salary. Their only income sources are likely from Social Security or pension benefits.
- Folks under the age of 72. before the age that the IRS requires distributions be taken from IRAs in the form of Required Minimum Distributions. Once RMDs start, you’ll likely get bumped into a higher tax bracket, and won’t have as much room, if any, for conversions.
- Folks with ample cash on hand. In order for a Roth conversion strategy to yield the greatest benefits, you’ll need the available cash to pay for the income tax generated by the Roth conversion.
In summary, at the moment, it’s really a win-win scenario in which to implement a Roth conversion strategy. Not only are you taking advantage of the low tax rate environment, but you’re also going to capitalize on the tax-free growth of those assets for years to come! And remember, if you’re currently in a low-income tax bracket, with cash on hand, this year through 2025 is the prime time to implement a conversion.
If you’re considering a Roth conversion strategy or wondering if you’re a good candidate for one, our team at Howe & Rusling is always available to help. Thank you so much for tuning into today’s episode of Street$marts with Howe & Rusling!