Even after you’ve retired, tax planning remains crucial. One powerful strategy is the Roth IRA conversion, where you move funds from a traditional, pre-tax retirement account (like a 401(k) or traditional IRA) into a post-tax Roth IRA. While you must pay income tax on the amount you convert in the year you do it, this can be a smart move for many retirees.
The core strategy is to execute conversions during your “low-income” retirement years—often the period after you stop working but before you start taking Social Security and Required Minimum Distributions (RMDs). By converting strategically, you can “fill up” lower tax brackets with income from the conversion.
Key Benefits of a Post-Retirement Conversion:
- Reduce Future RMDs: Converting traditional funds to a Roth reduces the balance in the account subject to RMDs. This lowers your future mandatory withdrawals, which in turn reduces your future taxable income and gives you more control over your cash flow.
- Hedge Against Future Tax Hikes: By paying the taxes on a portion of your retirement funds now, at a known rate, you protect that money from potentially higher income tax rates in the future. The converted funds can then grow and be withdrawn tax-free.
- Create a Tax-Free Emergency Fund: Once converted, the funds are in a Roth IRA. After five years, you have a pool of tax-free money you can access for large, unexpected expenses without creating a new tax liability.
It’s critical to be mindful of how a conversion might impact other aspects of your finances, such as Medicare Part B and D premiums (IRMAA), which are based on your income. A carefully planned conversion strategy, often spread over several years, can significantly enhance your financial flexibility and reduce your lifetime tax bill.
At Vernon Management Group, we help our clients right here in Short Pump and the greater Richmond area analyze the pros and cons. We’ll run the numbers and help you determine if a Roth conversion fits into your long-term financial plan.
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Disclaimer: This content is for informational and educational purposes only and does not constitute financial, legal, or tax advice. The information provided is general in nature and is not intended to be a substitute for professional advice tailored to your specific financial situation. All investing involves risk, including the potential for loss of principal. Past performance is not indicative of future results. Vernon Management Group, a registered investment advisor, provides this information with the understanding that you will consult with a qualified professional before making any financial decisions. We are not responsible for any actions taken based on the information contained in these blog posts. This article was written with AI and edited by a Vernon Management Group team member. Contact us today for a personalized consultation to discuss your specific financial needs.