Why Most People Don’t Take Advantage Of Roth Conversions

Apr 27, 2022

The theme this week on the Retirement Quick Tips Podcast is: Does It Matter When You Convert To a Roth IRA or 401k? 

Today, I’m talking about some of the drawbacks of a Roth conversion and Why Most People Don’t Take Advantage Of Roth Conversions.

Forking over that much in taxes and needing to pay it from an outside source (like your savings account) is a real obstacle. Some people are so turned off by writing a big fax tax check on a Roth conversion, that they just don’t do it, despite the clear long-term benefits in many cases. This is the biggest reason I see for people to decide that a Roth conversion isn’t for them…they simply don’t want to pay the taxes on the amount converted. 

This may be a rational choice, and it should be based on weighing a number of factors and potential downsides, not just the tears you’ll shed as you write that check to Uncle Sam. 

So here are a few other reasons why people don’t do Roth conversions and why you might decide Roth conversions aren’t right for you: 

1. You’re going to be in a significantly lower tax bracket in retirement…why pay the taxes now if the tax bite on future IRA withdrawals or RMDs isn’t going to be painful? 
2. You don’t have enough cash in your savings account to pay the taxes. 
3. Your income is higher this year and you expect it to be lower in future years - wait for income to go down some because the tax rate you’ll pay on the converted $s will be lower
4. You’re going to need the money that you converted to a Roth within the next few years. Roth IRAs have rules that make you wait a few years before withdrawing funds. There are some workarounds for this, but in general, it’s a good idea to not convert assets to a Roth if you’ll be withdrawing those Roth assets in the next few years. In the real world though, this is hardly an issue, since the Roth assets are usually depleted last when you’re withdrawing funds from your assets in retirement. 

Not sure if a Roth conversion is right for you? I’ll run the numbers for you to help you decide if a Roth conversion makes sense for you. Just email me your age, the $ amount you want to convert, and your expected income for 2022, and I will send you a personalized Roth conversion analysis and help you interpret the results. 

Just send me an email - [e-mail] - again with your age, the $ amount you want to convert to Roth, and your 2022 expected income. That’s [e-mail]

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance