As I write this blog post it is March 9th 2023 and over the last month or so conversions around tax planning and the topic of deductions for IRAs and Roth Conversions have come to the forefront of the discussion. Sometimes clients have plans that are well-thought out, but don’t account for effective tax rates when and how to draw income and part of my job is to help client understand tradeoffs in various planning decisions. Below are 10 Roth IRA strategies you can review to see if any apply to your personal financial plan and reach out if you have questions or interest in discussing further.
10 Actionable Roth Strategies
1. Determine projected income before year-end as a basis for a partial Roth IRA conversion
How can we accomplish this? We should be meeting between October and December of each year to look your current effective tax rate versus your future income/tax rate to determine if this applies to your financial plan.
2. Wait until year-end approaches to do a Roth IRA conversion
How? We need to see how this impacts your Medicare Part B/D premiums, if this would expose you to investment income surtax of 3.8%.
3. Contribute to a non-deductible IRA and then subsequently convert to a Roth IRA
How? If you earn over $138,000 as a single filer or $218,000 in 2023 you will be phased out of a straight contribution to a Roth IRA, the way to accomplish is by following a specific set of rules to convert a non-deductible IRA to a Roth IRA to build the account.
4. Business owners with net operating losses (NOLs) might consider a Roth conversion.
A NOL may occur during the tax year where business deductions exceed income
Unlike capital losses where taxpayers are limited to $3,000 annually to offset ordinary income there are fewer restrictions on utilizing a NOL – we can coordinate with your CPA if this applies to your business and you can read further on the topic here.
5. Leverage after-tax retirement plan contributions to a create a sizeable Roth position
How? Some retirement plans allow voluntary after-tax contributions into the plan.
6. Match tax deductions with a Roth IRA conversion
How? You can lump deductions in a tax year when converting traditional IRA assets to a Roth – getting the benefit of the deductions and offsetting with a Roth contribution.
7. Use first-to-die life insurance to fund a Roth conversion for a surviving spouse
How? Liquidity can be provided by life insurance proceeds to help surviving spouses cover the cost of a Roth IRA conversion.
Can provide a tax-free source of income to do a large conversion to further aid in estate planning.
8. Consider Roth conversions before reaching certain milestones
How? Many clients have different income sources and the more income sources the more you have options on where and when to draw income and this can impact your financial plan as certain years might make sense to do a Roth conversion.
9. Capitalize on market downturns as an opportunity for a conversion
How? During down years you can view this as a temporary opportunity to convert to a Roth IRA – the lower the value of the security the lower the tax cost of the conversion. If/when the security positions recovers the subsequent appreciation from the conversion date is tax free (assuming Roth requirements around qualified distributions are met).
10. Convert in retirement if leaving IRA funds to higher-income heirs
How and why? Due to the SECURE Act 10-year rule can mean a higher tax bill for heirs since the stretch option is no longer available.
This may make sense if the account owners are in a relatively low tax bracket and they forecast their heirs (children, family, etc.) might be in their peak earning years and want to protect the family legacy from being taxed.
Paying the tax bill on a Roth IRA conversion will also reduce the overall size of the estate – coordinating with your estate plan makes sense before implementing this strategy.