Roth Conversion Decision Tree

  1. Are you already taking Social Security (some SS may be taxed). Higher income may push you over an IRMAA cliff. <Do you have a flexible window to do a smart Roth Conversion?>

  2. Am I currently in a lower tax bracket than in the future? If in a lower tax bracket now, then it may be wise to convert with a lower tax rate than if done when at a higher rate. RMDs at 75 may push to a higher tax bracket.

  3. Is there room left in our current tax bracket? e.g. 22% or 12% bracket. May be the lowest they will ever see.

  4. Are we trying to reduce future RMD? Having a large deferred tax IRA & 401(k). Roth conversions can help reduce significant RMD, assuming longevity.

  5. Do we plan to leave legacy to heirs when in a higher tax bracket than we are? Legacy Roth withdrawals are tax free. If they are in a lower tax bracket, we may be paying taxes that they can afford. If they are doing well, a 10 yrs RMD legacy to them may push them into a higher tax bracket.

  6. Will the conversion push us over any key threshold? e.g. IRMAA, MAGI

7. If a Roth account has not been created, will I need those funds within 5 years? Must have a Roth account for 5 yrs before withdrawing. Funds do not need to sit in that account for 5 years. Each Roth conversion has penalty restrictions if under 59.5 yrs.

8. Can I pay the tax from outside the Roth/IRA? No penalties or reducing Roth assets.

9. What is my time horizon for growth. Roth work best if given time to grow.

Michael Wei