ROTH IRAs: Why You Might Need to Convert

Before we dive into ROTHs, I want to set the stage for why these are probably some of the most important tools in finance we have today. Most of us know that our government has a spending problem. I would liken it to a kid's spending spree in a candy store, with no intention of paying the bill. According to the US Debt clock, our national debt is nearing the $32 trillion dollar mark. Many economists and other prominent figures have argued for a while now that this is getting to be an unsustainable and irresponsible act, and this doesn’t even factor in all the future unfunded liabilities like Medicare and Social Security.

Former comptroller General David Walker, who was comptroller during Clinton, Bush and Obama has been very vocal that this will not end well. Likely tax rates will have to go up dramatically. We've had higher taxes before... in the 1980’s the highest marginal bracket was 50% and in the ‘70s that figure was 70%. Ask your parents or grandparents, they’ve likely not forgotten.

What can you do about it?

Enter the ROTH IRA.

For those not in the know, ROTH IRAs or ROTH 401ks are essentially retirement accounts you fund with after-tax dollars. That means, when you retire, you get to withdraw the funds tax-free. Think of it as reverse happy hour at your local pub. Pay full price now, but your future self enjoys a hefty discount.

But the real heart of today's talk is the ROTH Conversion. Now don't go running for the hills, folks. It's not nearly as intimidating as you may expect.

ROTH Conversion

A ROTH Conversion is, simply put, the process of turning a traditional IRA or pre-tax 401k into a ROTH IRA. It's like changing your rambunctious, wild barking dog into a cat. You pay taxes upfront, but then you enjoy the peace and quiet of tax-free growth and future withdrawals.

Pros & Cons

One of the commonly cited pros of ROTH Conversions is having no Required Minimum Distributions. This means you get to decide when and how much to withdraw.

One potential con, though, is the tax bill that comes with the conversion. It’s like buying an entire store's worth of Girl Scout cookies upfront. Sure, you'll enjoy the benefits later, but your wallet might not enjoy the initial shock. Mmm thin mints.

However, Kiplinger argues that the future tax savings can more than make up for this initial cost. Yes, it's an investment upfront, but you end up saving a lot over the years.

Lastly, I've often gotten pushback on the issue that a ROTH conversion can raise your IRMAA, that's your Income-Related Monthly Adjustment Amount for those not in the know. In layman's terms, it could potentially increase your Medicare premiums. Despite the initial increase, the long-term payoff of a ROTH Conversion can make it worth it since RMDs will be gone and you’ll potentially have ongoing lower taxable income, negating any short-term increase you initially had.

If you're like many of our clients, betting on higher tax rates in the future, paying now is like buying winter coats on discount in the summer. You’ll thank yourself when the cold weather hits.

In the end, the choice to do a ROTH Conversion comes down to your personal situation. But remember, folks, being informed is the first step to making wise choices.

headshot of Bradley

Bradley Ruh Owner, Financial Adviser


This material is for general informational purposes only and was produced by Action Financial Strategies, LLC. Life insurance is subject to underwriting. No coverage exists unless a policy is issued and the required premium is paid. Neither Action Financial Strategies nor NYLIFE Securities LLC or its affiliates provide tax, legal, or accounting advice. For advice on such matters, consult your own professional counsel.

Brian Ruh is a Member Agent of the Nautilus Group®, a Service of New York Life Insurance Company. Brian Ruh CA insurance license #OB66341. Brian and Bradley Ruh are collectively Registered Representatives of and offer securities products and services through NYLIFE Securities LLC. Member FINRA/SIPC, a Licensed Insurance Agency 999 Fourier Drive, Suite 300, Madison, WI 53717. (608)831-4416. Brian and Bradley Ruh are also collectively registered as Investment Adviser Representatives with Eagle Strategies LLC, a Registered Investment Adviser. Action Financial Strategies is not owned or operated by NYLIFE Securities or its affiliates.
SMRU #5716002.1