Tax Planning Strategies: Why Roth Conversions Remain a Smart Move
As the dust settles on the recent election, financial advisors are re-examining their strategies for clients. While tax hikes may be less likely under the new administration, Roth individual retirement account conversions remain a popular choice for investors seeking long-term tax planning.
A Growing Trend
Fidelity Investments has seen a significant 45% year-over-year increase in Roth conversions, with experts predicting this trend to continue into 2025. “We typically see an uptick in Roth conversions at the end of the year and into the new year ahead of the tax filing deadline in April,” notes Rita Assaf, vice president of retirement offerings at Fidelity Investments.
Unlocking Tax-Free Growth
Roth conversions involve shifting pretax or nondeductible IRA funds to a Roth IRA, which can spark tax-free growth. While investors must pay regular income taxes on the converted balance, this strategy can prove beneficial in the long run, particularly for older workers and retirees with sizable pretax balances.
Timing is Everything
Advisors often execute Roth conversions in lower-income years, such as early retirement before claiming Social Security benefits or taking required minimum distributions. This approach can minimize the upfront tax bill while reducing pretax balances. By “filling up the 12% and 24% tax brackets” with income triggered by a Roth conversion, investors can avoid a significant jump to the next tier.
Personalized Approach
However, whether Roth conversions make sense depends on an individual’s unique financial situation. Experts stress the importance of running a complete tax projection, including all sources of income, before executing the strategy. By considering all factors, investors can make informed decisions about their tax planning.
A Smart Move for the Future
While the threat of higher taxes may have diminished, Roth conversions remain a valuable tool for investors seeking to reduce long-term taxes on their portfolios. As Assaf notes, “Roth conversions can be a great way to manage taxes in retirement, and we expect to see continued interest in this strategy.”
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