A Roth conversion can make sense in a few scenarios.
Scenario 1: Low Tax Bracket Today
If you are in a low tax bracket today, it makes sense not to waste it. You need to consider a few items (taxes on Social Security benefits, Medicare surcharges, ACA premium subsidies, etc) which might make your effective marginal tax rate higher than what you see in the IRS tax tables. If any of these apply to you, then you’ll want to ask a tax expert to drill down and determine your true effective marginal tax rate.
The most advantageous time for a Roth conversion occurs right after the start of retirement, but before claiming Social Security. Assuming you have enough after-tax dollars to fund your living expenses, your tax rate should drop alongside your taxable income. The lower tax rate will increase the odds of success for the conversion.
Scenario 2: Higher Tax Rates In the Future
This scenario is more difficult to figure out. Sure, Congress could increase tax rates, but they might not. I always tell people the best bet with Congress is no change. Failing that, the next most likely outcome is oscillations back and forth as the political party in power changes through various election cycles.
But if you think future tax rates will move skyward, then converting could work out well. That is unless Congress decides to tax distributions from Roth IRAs in the future. Not likely, but not impossible either.
Scenario 3: Estate Taxes
Depending on what Congress does around the estate tax thresholds, it may become attractive to do a Roth conversion with a goal of reducing the value of your taxable estate. In effect, you would prepay your heir’s income tax bill, and the value of your taxable estate would be reduced as well. Ted Weschler’s IRA and the massive conversion he did a few years ago offer an example of this maneuver.
If you want to discuss any of these scenarios or any other ideas you may have, feel free reach out.
