The Benefits of a Roth Conversion for Retirees and Their Heirs
By Retirees looking to maximize their income and reduce taxes in retirement can consider a Roth conversion to transfer assets from a pre-tax account like a traditional IRA into an after-tax Roth IRA account. This requires paying taxes on the money in the traditional IRA in the year of the conversion, but the assets can then grow tax-free in the Roth IRA.
A Roth IRA conversion can be especially valuable for those who don't need their required minimum distributions (RMDs) to pay for living expenses, and instead, plan to pass on their savings to their heirs. T. Rowe Price found that using a taxable account to pay for the taxes associated with the conversion can boost heirs' eventual inheritance by up to 14%.[0]
However, Roth conversions may not make sense for everyone, especially those who expect to be in a lower tax bracket in retirement than they are currently.[0] The value of a Roth conversion also diminishes if the account that's used to pay the taxes produces 100% tax-free returns.[0]
It's important to note that a Roth IRA is not a tax-free retirement vehicle.[1] The money that is contributed to a Roth IRA has already been taxed. Therefore, when a retiree withdraws money from a Roth IRA, they don't have to pay taxes on any of the money – principal or interest – since it has already been taxed.[1]
0. “Want to Leave Assets to Your Heirs? Consider Using a Taxable Account to Pay for a Roth Conversion” AOL, 8 Mar. 2023, https://www.aol.com/finance/want-leave-assets-heirs-consider-191202148.html
1. “Shifting Retirement Assets From Tax-Deferred To Tax-Now By 2026” Financial Samurai, 8 Mar. 2023, https://www.financialsamurai.com/shifting-retirement-assets-from-tax-deferred-to-tax-now-roth-ira/
