Ah, the holiday season… a time for joy, gratitude and (unfortunately) for some the ritual of cramming late nights to ensure they don’t pay more in taxes than necessary now and in retirement.  

Sure, they could be planning for family get-togethers, attending holiday parties with friends or enjoying eggnog by the fire. But no, that’s all too festive and cheerful. 

Instead, they build spreadsheets, search IRS interpretations, and obsess about miscalculating their household adjusted gross income (AGI) and threshold $ amount to convert to a Roth IRA. Then when the time comes to execute the conversion, there is a feeling of dread. Like that of being outside in the freezing cold and “tripled dog-dared” to stick their tongue to a metal pole. 

Let’s discuss a better (and safer) way.  

What Is a Roth Conversion?

At its core, Roth conversion is like wrapping up retirement savings into a tidy, tax-advantaged gift package. You take funds from a traditional IRA or 401(k) — accounts taxed when you withdraw in retirement — and convert them into a Roth IRA. In doing so, you pay taxes on the converted amount now at your income brackets. 

However, once in a Roth, it gifts:

• Tax-free growth

• Tax-free withdrawals in retirement

• Removal of Required Minimum Distributions

• Tax-free distributions for non-spousal beneficiaries

Make Modeling a Roth Conversion Joyous.

Just as giving perfect holiday gifts require planning, so does Roth conversion. 

In working with clients, ideally we build or update their Roth conversion model in February or March using prior year data with intentions of waiting until December to run again with actual tax data and execute. 

Beyond the adage “measure twice, cut once” and making it less stressful during the holidays, this provides readiness for opportunities. One such example is converting in a steep market decline during the year. If you’re going to hang onto the same security/strategy, why not convert some at a lower value (equals less taxation) and allow for time to bring price recovery inside the Roth IRA instead?

How You Model Makes a Difference

Modeling a Roth conversion is like preparing a delicious holiday feast - attention to detail and coordinated foresight can make all the difference. Beyond current tax situation, age, goals, and cash to pay taxes, there are several future questions to answer in analysis.

In the near-term, will future years have lower taxable earnings to more favorably convert? Will your state of residence change and if so, does your taxation change? What are projected growth rates for Roth, are they more aggressive? Should they be?

For retirement, have you projected RMDs at age 73 (75) and resulting new tax bracket? Does conversion help or hurt Social Security and Medicare taxation? 

What’s your expectation of future taxation by governments? 

What are your estate planning wishes?

Respect The Grinch

The pro-rata rule. When converting, the IRS combines all traditional IRA balances and asks about nondeductible contributions, as this portion is not taxable. Understand the IRS doesn’t allow for conversion of just after-tax money. 

It is what it is. Once a Roth Conversion is done, it’s done, as IRS no longer lets you unwind (recharacterize).  

Not all-or-nothing. You can develop a plan to spread conversions over several years, even skip a year or two as needed pending AGI levels and ability to pay the IRS with non-IRA assets.

The Gift of Time and Independence

Consistent and well-timed Roth conversions can be the gifts that keeps on giving — tax-free growth, tax-free withdrawals, and the peace of mind that comes with control. 

May the holiday season bring you good cheer and health throughout the coming year. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.

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