Should you do a partial Roth IRA conversion?

Almost everyone who I meet with has at least some money in an Individual Retirement Account. Conventional wisdom encourages people to save as much as they can into retirement accounts because contributions get a tax deduction and grow tax deferred. However, despite these great tax benefits, ordinary income tax is due on all funds when withdrawn from these accounts, yet we don’t know what tax rates will be at that time. The amount of tax due will be predicated on the prevailing marginal tax rates at the time of withdrawal and the overall income level of account owner.

The advantage of converting all or part of one’s IRA to a Roth IRA is twofold. First, the converter is eliminating all future tax liability at current rates that are relatively low. Second, Roth IRAs do not have required minimum distributions and, as such, are an excellent family wealth transfer tool.

The real question is who is the best candidate for a Roth conversion? The answer is very simple. If you believe tax rates are historically low (they are) and that rates will eventually rise in the future the next time Democrats take control of Congress and the executive branch, then it’s probably wise to start converting sooner rather than later. Moreover, if your IRA beneficiaries (your children) are in higher tax brackets than you are, Roth conversions will likely result in a substantial reduction in your family’s tax liability. In any case — whether you like it or not — the government is your family’s silent partner in your IRA. It’s up to you to proactively make the smartest possible choices to efficiently dissolve that partnership. Simply choosing to defer that tax for as long as possible is probably not the most optimal strategy.