The Benefits of a Roth IRA Conversion:
A Strategic Move for Long-Term Tax Planning

The Benefits of a Roth IRA Conversion:
A Strategic Move for Long-Term Tax Planning

by Fraley Carlton – Private Wealth Advisor

Taxes play a major role in retirement planning, and one strategy that continues to gain attention is the Roth IRA conversion. While it’s not right for everyone, converting assets from a traditional IRA to a Roth IRA can offer meaningful long-term benefits, particularly for those focused on tax efficiency and legacy planning.

Here’s how Roth conversions work and why they may be worth considering.

What Is a Roth Conversion?

A Roth conversion involves moving funds from a traditional IRA or another pre-tax retirement account into a Roth IRA. You pay income taxes on the converted amount in the year of the conversion, but in return, those assets may grow and be withdrawn tax-free in retirement, if certain requirements are met.

The decision often comes down to timing: paying taxes now versus later.

Why a Roth Conversion Can Make Sense

Tax-Free Withdrawals in Retirement
Withdrawals from traditional retirement accounts are taxed as ordinary income. With a Roth IRA, qualified withdrawals of both contributions and earnings are tax-free, which can provide greater flexibility, especially if you expect to be in a higher tax bracket in the future.

Tax-Free Growth Without RMDs
Traditional IRAs require Required Minimum Distributions (RMDs) beginning at age 72 or 73, depending on when you were born.* These mandatory withdrawals can increase taxable income and reduce long-term growth.

Roth IRAs are not subject to RMDs during your lifetime, allowing assets to remain invested and grow tax-free for as long as you choose.

A Tax-Efficient Inheritance
Roth IRAs can support estate planning goals. While beneficiaries must take distributions, those withdrawals are generally free from federal income tax, provided the account has been open for at least five years.

Access for High Earners
Even if your income exceeds Roth IRA limits, there is a “backdoor” strategy that may allow you to open a Roth IRA by contributing to a traditional IRA and then converting those funds. Understanding the tax implications (especially if you hold other IRA assets) is essential before moving forward.

Understanding Roth IRA Withdrawal Rules

Knowing how Roth IRA withdrawals work is key to maximizing their value.

• Contributions vs. earnings: Contributions can be withdrawn at any time without taxes or penalties; earnings follow different rules.
• Before age 59½: Earnings withdrawn early are generally subject to income taxes and a 10% federal penalty, unless an exception applies.
• After age 59½: Contributions and earnings can be withdrawn tax- and penalty-free, provided the account has been open for at least five years.
• The five-year rule: The clock starts January 1 of the year of your first Roth contribution. Each conversion also has its own five-year holding period before converted amounts can be withdrawn penalty-free.
• No RMDs: Roth IRAs are not subject to required minimum distributions during your lifetime.

Weighing the Trade-Offs

The primary consideration with a Roth IRA conversion is the upfront tax cost. Paying taxes today can make sense in the right circumstances, but the decision should be coordinated with your income, tax bracket, and overall financial goals.

The Bottom Line
A Roth conversion can be a powerful tool for reducing future taxes, increasing retirement flexibility, and creating a tax-efficient legacy. But it isn’t a one-size-fits-all solution.

If you’re considering a Roth conversion or want to better understand how Roth IRA rules apply to your situation, a conversation with a financial advisor can help determine whether this strategy fits into your long-term plan.

Interested in exploring whether a Roth IRA conversion is right for you?
The Pentas team is ready to meet with you and take a closer look at your options.

*If you reached age 72 on or before December 31, 2022, RMDs already apply. Otherwise, your first RMD generally begins at age 73.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Fraley Carlton