Roth Conversions: Converting too much or too little?

Roth conversions: Converting too much or too little?

One of the most common questions that we get is, should I do a Roth conversion? And if so, how much?

What is a Roth conversion?

Now, for those that don’t know what a Roth conversion is, all it is is simply taking money from your IRA or 401K retirement accounts and converting them to an after-tax Roth 401K or a Roth IRA. Now, there are significant tax benefits for having these accounts, but there are many factors that should be considered before you make that decision to doing a Roth conversion.

Factors that may include where am I in the tax bracket today? What is my tax bracket projected to be in retirement? How do Required Minimum Distributions fit into all this? And what happens if my spouse passes away early during my retirement?

Today, I’d like to talk about a few of those costly mistakes that many people make when considering a Roth conversion in their retirement.

Many people get carried away with Roth conversions

First, many people get carried away with Roth conversions. There’s a lot of content and information about Roth conversions in the news, media, and nearly every financial institution has an article or content about it. But, often retirees get carried away and think I needed to be doing as much as I can into a Roth IRA or a Roth 401K, but they may not be seeing the tax impact of that during their retirement.

You take a look at the tax brackets, you’ll notice that it starts off with the 10% bracket, 12% bracket, but then it jumps, significantly jumps, to the 22% bracket. There’s more significant jumps throughout the tax brackets as well. But, what we see is when people come into our office, they say they have been doing Roth conversions and they end up making these big jumps in their taxes. But in reality, their tax bracket may not be as high in retirement as what they thought it was going to be.

People fail to plan for their Required Minimum Distribution

The second mistake is people fail to plan for their Required Minimum Distributions. All Required Minimum Distributions are is that you are forced to withdraw a certain amount out of your IRA or 401K account as soon as you reach age 73. Now, if you’re a retiree that is relying on your investment income then this may not be as big of a deal for you because you are relying on that income throughout your retirement.

But for most retirees, that income is not their only source of income. They may have pensions, Social Security, rental income, and more. And so what we see is retirees will get into retirement, start their Required Minimum Distributions, and then they’re not using all of their investment income, which is just ultimately going to be withdrawn from their retirement accounts and taxed.

Every retiree should have a plan on how their Required Minimum Distributions are going to impact them during and throughout their retirement.

The next mistake is how Roth conversions can potentially impact your Medicare premiums. Many may not realize that Medicare premiums is based on your combined income. And so the more income you have, the higher your potential Medicare premiums will be. The base Medicare premium cost for Part B is $164.90.

For those that are married and file a joint return, that will stay the same if their income stays below $194,000. If you’re a single filer and your income stays below $97,000, it will also stay that same amount. But as soon as your income is a dollar over that threshold, it will jump to $230.80. Believe it or not, there are actually four other thresholds or for other increases to your Medicare premiums above that. So if you have substantial income coming in, your Medicare premiums could be as high as $560.50 per person per month.

So as you can see, Roth conversions can make a significant impact. You may be wanting to do Roth conversions to save taxes, but you may be adding additional expenses to your Medicare premiums along the way.

What non-financial aspects of Roth conversions should be considered?

Lastly, there are some non-financial aspects of Roth conversions that should also be considered. Things like moving from one state to another. If you live in a state that doesn’t currently have state income tax and moving to a state that does, that can be a big factor.

Or if you have a spouse that has a terminal illness and isn’t expected to live throughout a long retirement, knowing how Roth conversions can impact them. Or even potentially your heirs, how these Roth conversions could help your heirs for generation after generation.

With the new changes to secure Act 2.0, some of your heirs may be required to withdraw all of the money from IRA or retirement accounts within ten years. So having a plan to consider these other non-financial aspects is so important.

Now, there is an important disclaimer I have to share about Roth conversions and tax planning altogether is there are some things that are just simply out of our control. Whether that be market movements, or changes in legislation, tax laws, is always constantly evolving.


What I like to share with my clients is financial planning also evolves with the time and changes. We plan for the best and if there are any changes, we make adjustments along the way. Now, Roth conversions may seem straightforward, but it’s important that retirees carefully consider the factors that we’ve talked about today. Roth conversions may seem straightforward, but it’s important that retirees carefully think through these considerations that we’ve talked about today.

The best way to protect yourself from these costly mistakes is to simply have a plan. A plan that is dollar specific, goal specific, and that addresses other non-financial aspects of Roth conversions. As you do so, you’ll start to address these items and you’ll see that it’s going to help you maximize your retirement.

About the Author

Carson Johnson is a Certified Financial Planner™ professional at Peterson Wealth Advisors. Carson is also a National Social Security Advisor certificate holder, a Chartered Retirement Planning Counselor™, and holds a bachelor’s degree in Personal Financial Planning and a minor in Finance.

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