Don’t Wait: Why Year-End Roth Conversions Can Be Risky
If you’re considering a year-end Roth individual retirement account (IRA) conversion, don’t wait too long. Financial experts warn that procrastination can lead to unexpected consequences.
What is a Roth Conversion?
A Roth conversion moves pretax or nondeductible IRA funds to a Roth IRA, allowing for tax-free growth. However, this comes with a trade-off: upfront taxes on the converted balance, which increases your adjusted gross income.
Why Timing Matters
Roth conversion timing is crucial, especially for those eager to complete the transaction in 2024. Some investors want to take advantage of lower tax brackets, which are scheduled to sunset after 2025 without Congressional action. However, predicting future tax law changes is challenging due to uncertain control of the White House, Senate, and House of Representatives.
Year-End: A Popular Time for Roth Conversions
Year-end is a popular time for Roth conversions because it’s easier to project tax consequences. According to certified financial planner Ashton Lawrence, “You have a clearer picture of your income sources” for the year, including bonuses, mutual fund distributions, or partnership earnings.
Don’t Wait Until December
While tax projections are important, waiting too long can be risky. Your financial institution may be overwhelmed if you wait until December, warns CFP and enrolled agent Tricia Rosen. She recommends starting the process early to determine if a Roth conversion or partial Roth conversion makes sense.
Start the Conversation Now
Lawrence agrees, stating that while he typically completes Roth conversions in December, he begins the process earlier. The timeline can be shorter than investors expect, especially during the holidays. “Right now is a good time to start having that conversation,” he advises.
Avoid Unintended Consequences
Roth conversions can trigger other tax consequences, such as higher Medicare Part B and Part D premiums for retirees. Don’t wait until it’s too late; start planning your year-end Roth conversion today.
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