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As a financial adviser, I often meet investors who are confused about Roth conversions.
They get bounced between a certified public accountant (CPA) and a financial planner, each deferring to the other on whether converting a traditional IRA to a Roth makes sense.
The result is that there is no clear direction on a crucial decision.
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This siloed approach leads to half-baked recommendations.
I’ve heard advisers say, “Sure, convert $20,000,” or the opposite, “No, don’t bother,” with little analysis. These answers usually consider only the immediate tax hit and ignore other factors.
A Roth conversion can affect your Medicare premiums, trigger additional taxes or alter your estate plan. Any advice that overlooks these implications is incomplete.
Why do many advisers avoid detailed Roth advice? It’s complicated. Most advisers aren’t trained for in-depth tax planning, and many CPAs focus on last year’s taxes rather than future projections.
It’s easier to give a quick yes-or-no answer than to crunch all the numbers. But without doing the math, you’re essentially flying blind.
A real-world example of what’s missing
Here’s a common example: A couple in their late 60s has about $500,000 in a traditional IRA. A previous adviser has already reviewed their Roth conversions and told them that it wouldn’t really make a difference.
On the surface, this advice seems reasonable. Whether they convert now or take required minimum distributions (RMDs) later, the total income tax looks about the same.
But that conclusion only tells part of the story.
When we step back and do a deeper review, several important costs have been left out of the equation.
For one, larger IRA withdrawals can push income high enough to trigger higher Medicare Part B and Part D premiums, known as the IRMAA. Those increases don’t show up on a tax return, but they absolutely affect a retiree’s cash flow.
Then there’s the issue of required minimum distributions (RMDs). The couple doesn’t need all the money they’d be forced to withdraw. That excess would likely end up in a taxable account, creating a new layer of taxes each year on interest, dividends and investment gains.
Finally, we would look at what would happen down the road. Any money left in the couple’s traditional IRA would eventually go to their children, along with a tax bill. In contrast, assets moved to a Roth IRA could be inherited tax-free, which could make a meaningful difference to their family.
Once we put all of those pieces together, the picture changes. Converting part of the IRA now means paying a single, known tax bill. Doing nothing means facing several smaller, less obvious taxes over time: Higher Medicare costs, ongoing investment taxes and a potentially large tax burden for their heirs.
With the full analysis in front of them, the couple can choose a carefully planned Roth conversion, confident that it will reduce their total tax exposure and better support their long-term family goals.
Get a comprehensive plan in writing
This example shows that Roth conversions have many moving parts. You need a holistic plan that examines all the angles, ideally documented in writing, so you can review it.
If an adviser gives you a yes-or-no answer on a conversion without a thorough written analysis, it’s a red flag.
You deserve to see the numbers behind the advice.
Every Roth conversion recommendation I make comes with a detailed tax projection. I run scenarios to see the ways in which different conversion amounts would impact not just your current tax bill, but also future Medicare costs, investment taxes, RMDs and even what your heirs might owe.
It’s work-intensive, but it’s the only way to get a reliable answer. This thorough approach ensures that all the angles are covered, not just one.
How can you make sure you’re getting this level of analysis? Ask your adviser if you can get a model Roth conversion in writing.
If they can’t or won’t provide one, consider seeking a second opinion from someone who will. The goal is to have all the facts before you decide, so there are no surprises later.
Focus on the ‘who,’ not the ‘how’
Focus on the “who,” not the “how.” You don’t need to become a tax expert to figure out Roth conversions. You need the right expert who can guide you.
Rather than trying to learn every tax rule yourself, ask, “Who has the expertise to handle this for me?”
For Roth conversions, that “who” could be an adviser with advanced tax training (for example, a Certified Tax Specialist) or a team that includes a CPA. Once you find that person, they’ll handle the “how” and give you a clear plan.
Don’t settle for vague advice on a Roth conversion. Find an adviser who will crunch the numbers and show you the complete picture.
By focusing on the right “who,” you’ll get the right strategy — one that’s grounded in solid analysis and tailored to your goals.
Ezra Byer contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
