Disclaimer: This post is reshared from Northstar Finances with permission to share images and post here with you all. I am biased (which I admit - but it does not mean I am wrong) in trusting Northstar. Just like you all have your bias, I too have mine.
My bias was formed after hearing their founder Allen Giese speak during the financial planning module of Fundamentals 1. Allen has 30+ years of experience as a wealth manager and financial advisor, several hundred million under management.
Think about him like you do with Dan Pfaff, except Allen knows how to and worked with as many (if not more) millionaires as Dan did Olympians (click here for my CMW episode with Coach Dan Pfaff where we do talk about all the things he learned in his career working with so many Olympians).
Now you know why I am biased to Northstar and Allen just like I am biased to listen to things Coach Pfaff says. Now, for the article on your retirement....
It is rare to find a financial planning strategy that applies universally in all situations. In fact, I can’t think of a single one. Roth conversions are no exception despite the amount of material I see on converting your traditional IRA to a Roth IRA.
There is no question that converting all or part of your traditional IRA to a Roth IRA could be a good idea. Roth IRAs have some powerful advantages over traditional IRAs. Income withdrawn from a Roth at retirement isn’t subject to income tax. There are no required minimum distributions (RMDs) for a Roth at age 73 and beyond. Your heirs will inherit your Roth IRA tax-free. And while traditional IRAs force you to take income once you hit a certain age—and that income possibly forces you into a higher income tax bracket and a higher Medicare premium bracket—there’s none of that with Roth IRAs.
Considering all those attractive features, it’s no wonder so many assume it’s always a good idea to recategorize their traditional IRA dollars to a Roth IRA—even with having to pay the tax up front on those conversion dollars. So when is it not a good idea to convert to a Roth IRA?
A Question of Future Income vs. Current Income
The basis of a Roth conversion is to pay a tax today to avoid a bigger tax tomorrow. In its simplest terms, if you expect that your income and tax bracket will be higher in the future than it is today, then a Roth conversion may be a good idea.
If you expect that your income and tax bracket will be lower in the future, you might want to consider holding off on that conversion.
Why might someone’s future tax rate increase? An expected inheritance would be one example. Another might be a property sale or a reduction in deductions. Tax rates could go up. Certainly, a large contributor for many of us to incur higher income and tax rates would be RMDs.
RMDs are the minimum distribution amounts the IRS requires you to take out of your traditional IRA starting in the year you turn 73 (that changes to age 75 starting in 2033). Especially if your IRA is quite large, these taxable withdrawals may cause enough taxable income to push you into a higher tax bracket. They could also trigger a Medicare surcharge since Medicare premiums use an income table, much like income taxes.
A Roth conversion now reduces your RMD later, simply because the traditional IRA would be smaller than it would have been without the conversion. But the conversion needs to be weighed against potentially paying a higher tax now (and possibly at a higher tax bracket) for doing the conversion now.
The Effect on Your Heirs
We believe that the motivation to do a Roth conversion is often rooted in legacy concerns. How much better off do we want to make the kids or our younger heirs, whoever they might be and whoever will be inheriting what’s left in our IRA?
If that beneficiary of your IRA is already in higher tax brackets because of high-paying careers, then converting at least part of your IRA now may be a very good idea. This is especially so if you currently find yourself in a lower tax bracket. But you may want to hold off if you are in a higher tax bracket and they are in a lower tax bracket.
Another consideration around younger heirs is your thoughts about future tax brackets. Many consider that we are currently in the lowest tax rate environment we’ve seen in our lifetimes. They wonder, with good reason, if that is sustainable for the U.S. economy, with infrastructure concerns and simply having a smaller level of wage earners. The majority of the boomer generation is now retired or will be retiring soon.
Is it inevitable that tax brackets will be forced higher in the decades to come? If that is something you feel is likely or highly probable, then a Roth conversion now may make a lot of sense. At the very least, it may push you into a decision if you were on the fence about the idea of converting to a Roth.
Qualified Charitable Distributions (QCDs)
There are other ways to diminish the value of your traditional IRA without doing what could be an expensive Roth conversion—especially if you are charitably inclined.
If you are 70 ½ or older (don’t ask me why that age—nobody knows), you can give up to $108,000 (for 2025) in contributions to qualified charitable organizations directly from your IRA—without having to pay any taxes!
This is a smart move on a few levels. First, it’s a wonderful thing to do for the charity involved—and so many wonderful organizations need and depend on your help.
Second, unless you are currently claiming more in deductions than the standard deduction ($15,000 for single filers, $30,000 for married filing jointly), then you effectively get no tax break for charitable giving. But with a QCD, since you are giving pre-tax dollars directly from your IRA, you are getting the benefit of the tax break in addition to the standard deduction!
Third, the QCD counts as part of (or possibly all of) your required minimum distribution, saving you from claiming that income on your tax return.
Another reason to consider keeping money in a traditional IRA is in the event you’ll need some funds to pay for medical or long-term care expenses in later years. These expenses are deductible on Schedule A, so using traditional IRA money for them reduces the taxes on those with withdrawals.
Conclusion
There are a lot of factors to consider when converting traditional IRA dollars to Roth IRA dollars, and it’s certainly not a one-size-fits-all strategy. Perhaps a good discussion with your Northstar advisor will help you discover if it’s a good idea for you—or not.
Word from SCN on all of this money talk
That was the end of the article from Northstar. Now you again see why I am biased. If you want to hear more on this topic you can hear me speak with my PERSONAL financial manager Charlie Thomas. Yes, I put my money where my mouth is and I hired Northstar after I completed Fundamentals 1.
In the convo with Charlie he uses a basketball example talking about your starting 5 players with respect to your financial team. Here is a spoiler, you are the coach and the PG is your financial planner. You won't be able to guess who your SG and your big man are. Be sure to check the episode out so you can handle your finances and be able to provide for yourself, your family (if you have one), loved ones (if need be), and those who need help (charities).
