Why is a Roth Conversion with McBeath Financial Group Different?

How a Roth conversion is done can make a dramatic difference in the outcome!

Over the last couple of years, most people have heard of the term “Roth Conversion.” Some people have probably researched it and understand some of its benefits. And a small percentage have even initiated or attempted to initiate this strategy. So, what is all the craze about, and are Roth IRA or Roth 401(k) conversions beneficial for everyone in all situations?

Let’s start with what a Roth conversion is. A Roth IRA conversion or Roth 401(k) conversion is a transfer of retirement assets from a traditional retirement account into a Roth retirement account. This transfer creates a tax event for the account owner to pay income tax on the conversion amount. The benefit of this transfer is the opportunity to choose when to pay the income tax on the assets, rather than waiting until age 72 when the account owner is required to start withdrawing the assets and pay the tax. This strategy is most advantageous to implement when someone is currently in a lower tax bracket and believes they will be in a higher bracket in the future.

One of the biggest reasons this strategy has gained such popularity over the last couple of years is due to the SECURE Act of 2019. This legislation changed the rules to eliminate the “stretch IRA” for most non-spouse beneficiaries. This change primarily affects people who ultimately plan to leave their retirement accounts to their children after they have passed. Instead of their kids taking small required distributions over their lifetime, they now have only ten years to withdraw the entire account value. For tax-deferred accounts, this means taxation on those distributions at their beneficiary’s ordinary income tax rate at the time of withdrawing. For many, this could cause a huge tax liability in the highest-earning years (therefore highest tax rates) of their heir’s lives.

Another reason Roth conversions are talked about so frequently right now is due to recent tax rate changes. In 2017, the Tax Cuts and Jobs Act temporarily lowered tax rates and increased tax brackets for individuals. This temporary cut in tax rates is only scheduled to last through 2025, so now may be the optimal time to take advantage of this situation. Unfortunately, when this sunset occurs, the marginal tax rate for most people will rise by 3%, even if their income doesn’t change.

So, could this strategy benefit you? Unfortunately, the answer to this question is very complex. Most people planning to initiate a Roth conversion know the basics – look at your tax rate and max out your current bracket. But many people may not know what comes next or how this one transfer can affect so many other aspects of a person’s finances.

Think about this…

  • Will I be in a lower tax bracket in retirement or at RMD (Required Minimum Distribution) age?
  • Will I need to use my RMD to cover living expenses at age 72 and beyond?
  • Could the conversion increase the taxes on my social security benefits?
  • Could it push me into a higher capital gains tax bracket?
  • What about Medicare premiums? Could this cause a surcharge in a couple of years?
  • Might it cause a 3.8% surtax on my net investment income?
  • How will the change in tax brackets and tax rates scheduled for 2026 affect my tax liability in the future?

When these items are carefully considered, and a Roth conversion strategy is executed correctly, it can add up to a real impact on the results of accumulated wealth.  

Over a 20+ year timeframe, an optimized, carefully planned conversion strategy usually shows a dramatic difference in growth from that of a conversion done outside of a strategic financial plan.  

At McBeath Financial Group, analyzing the benefit of tax strategies like Roth conversions is part of our planning process. Each client and situation is different, so there is no “one size fits all.” By taking an all-inclusive approach to financial planning, we have the information and knowledge to create a strategic Roth conversion plan and answer the questions listed above.

We not only calculate the optimal amount of the Roth conversion but also analyze the effect of the conversion on a client’s cash flow, income tax rate, estate plan, and Medicare surcharges. In addition to our financial planning software, we use an advanced tax program to review our client’s prior-year tax return and simulate the tax liability of the Roth conversion. Our tax strategies are reviewed and updated annually and even initiated by MFG as part of our investment advisory services.  

Roth conversion can be especially beneficial for retirees in certain situations. For example, people who will receive a pension in retirement. Many people believe they will be in a lower tax bracket later in life. However, this is rarely the case for those with pensions once their social security benefit, pension income, and required minimum distribution are all active. Therefore, a Roth conversion may lower income taxes over their lifetime and significantly increase their portfolio values. But remember, it isn’t usually as simple as just maxing out the current tax bracket.

If you believe a Roth conversion may benefit you or are interested in learning more about them, please reach out to us! We specialize in planning for people within two years of retirement or who are already retired. Coincidentally, this is typically the time when Roth conversions are most beneficial. We have seen the benefit it has brought to so many of our client’s plans and want to share the news!

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