Roth IRA Conversions as a Tax Strategy

Based in St. Louis Park, Minnesota, Travis Hansberger provides a host of client-driven solutions as head of Millstone Wealth Management. Working closely with individuals and families, Travis Hansberger has extensive knowledge of tax-free retirement income strategies such as the conversion of assets in a traditional IRA to a Roth IRA.

The benefit of the Roth IRA is that taxes are paid beforehand and thus qualified withdrawals are federal income-tax free. They may also qualify as tax-free at the state level, with the caveat that those who receive funds tax-free must be 59 and a half or older and fulfill a five-year holding requirement.

When converting a large IRA to a Roth account, one strategy is to accomplish this piece by piece, by “filling the tax bracket.” This ensures that your tax bracket does not get bumped up to a higher level during the process. At the same time, this can help you avoid paying taxes associated with a Roth conversion involving money held in retirement accounts.

One major reason why a Roth conversion is attractive now is that it comes before the potential expiration of lower federal tax rates at the end of 2025. Paying taxes at current rates is a hedge against a rise in taxes in the future, which may be considered necessary to cover extra stimulus and infrastructure spending