Roth IRA conversions have been in the news a lot lately. Why, and more importantly when, does it make sense to consider this?

Types of IRAs

There are two main types of IRA 

• Traditional, where you get the tax break when you save into it, and you pay no taxes on it until you withdraw your money, and
• Roth, where you put after-tax money into it and let it grow tax-free; qualified withdrawals are tax and penalty free.

Both IRAs are meant for retirement, not wealth distribution after death, and the IRS has rules for both.

Whis is better - and why convert?

The first step of deciding Roth vs. Traditional is to make an educated guess if your tax bracket is likely to be higher during the years you are working and contributing, or if you think your tax bracket will be higher during your retirement years.

• If you expect your higher income tax bracket is now, then a traditional IRA may make sense: you may get a tax break for saving into the IRA. Distributions will be taxed, but at a future lower rate.
• If you expect your tax bracket may be higher in retirement, then a Roth IRA may make more sense. You do not receive a tax break while saving, but the funds can grow and the distributions are not taxed subject to IRS guidelines.

Traditional IRAs, but not Roths, do have a required minimum distribution beginning at age 73. If the distribution is enough to put you into a higher tax bracket or trigger the higher Medicare IRMAA [Income-Related Monthly Adjustment Amount] costs, you may be hesitant to take that required minimum distribution. Not taking the RMD comes at a high tax penalty: 25%. The penalty used to be a whopping 50%!

That’s why some people convert all or a portion of their Traditional IRAs to Roths. When depends on two things: your tax bracket and your Medicare rate. If you are in the highest tax bracket and likely to stay there, it often makes sense to convert, even though it generates a taxable event. The Roth can then continue to grow tax-free. If you are not in the highest tax bracket but high enough to be paying more than a couple of hundred dollars for Medicare, it’s time to do a little math.

Calculate your taxable income, then subtract that amount from the upper limit of your tax bracket. The remaining amount is how much you could convert this year while remaining in the same tax bracket. For example, the 2026 24% tax bracket for single filers is $105,701 to $201,775. If your taxable income is $190,000 then you can convert up to 11,775 without bumping into the 32% tax bracket.

You can repeat this process every year!

How can I decide?

The first step in considering a Roth conversion is to line up a few numbers.

Look at your tax returns and see what tax bracket you were in last year.

Estimate your taxable income for the upcoming tax year.

Look at the tax brackets for the upcoming year on www.IRS.gov

Look at the Medicare IRMAA brackets for the upcoming year from www.Medicare.Gov

Careful!

The number of footnotes and exceptions is large, and the fine print is plentiful. If your back-of-the-envelope math tells you to consider a Roth Conversion, consult with a financial advisor or trusted sources.

COAERS members who expect to be in a lower tax bracket in retirement may not decide to consider a Roth IRA; however, members who expect to be in a higher tax bracket in retirement may benefit from converting some or all Traditional IRA funds to a Roth IRA.

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