The Seven Cases to do a Roth Conversion

It may be time for your clients to convert their traditional IRA’s  or 401K’s to an after-tax Roth account. 

The difference between a traditional IRA and a Roth IRA is that traditional IRAs “get a tax deduction when you contribute but pay taxes when you take it out.” Roth IRAs get no tax deduction when contributions are made, but grows tax-free.

It is important to discuss all relevant factors when advising clients to move to Roth IRAs. 

There are seven situations to consider for each client when providing advice on this issue.

1. Is the Roth pot of money small compared to the taxable and tax-deferred pots?
2. Is the current marginal tax-bracket low? This could be the case if the client retired before taking Social Security or RMDs, or if they are starting a pass-through business (LLC or Sub-S) with very little income or even losses.
3. Will the client have high income in retirement, such as pension income?
4. Will the RMDs be burdensome if the client doesn’t convert some money to the Roth?
5. Does the client have any after-tax money in their tax-deferred accounts and, if all IRAs are converted, will that allow for future backdoor Roth contributions?
6. Will the client benefit from a possible state income tax-exemption for amounts converted?
7. Are there some estate planning benefits from conversions?

See Allan Roth, The Seven Cases to do a Roth Conversion, Advisor Perspectives, September 14, 2020. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.