Roth IRA Conversion: When and Why?

Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™

Jul 28, 2020 Share This 


Roth_ConversionMillions of Americans participate in traditional IRAs (individual retirement accounts) to build their retirement savings. While no one would argue against contributing to a retirement account on a consistent basis, the type of account those funds go into may be up for debate.

Though they have similarities, there are a number of compelling reasons you may want to advise investors to consider converting their traditional IRA over to a Roth IRA.

Timing of Taxes

One of the more notable differences between traditional IRAs and Roth IRAs is when a client pays taxes. Traditional IRAs are taxed later when funds are withdrawn, whereas Roth IRA contributions are made with after tax dollars.

Not having to worry about taxes on withdrawals in retirement is appealing to many investors. Arguably, pre and post retirement tax brackets being the same, a Roth IRA has the potential to grow to a larger amount, net of taxes.

Timing of Withdrawals

Generally, most traditional IRA investors must take their first required minimum distribution (RMD) when they turn 72 and in each subsequent year thereafter. Failure to withdraw required RMDs in accordance with IRS rules will result in a 50% excise tax on the amount not withdrawn.1

Benefits of a Roth IRA vs. Traditional IRA

Depending on the strategy you’ve helped your client develop, they may not wish to draw down tax-deferred investments in retirement, even when they are forced to through RMDs. An advantage of Roth IRAs is that no RMDs are required except on death. Roths also allow for greater flexibility in tax and income planning.

Something that’s not always top-of-mind is that the reduction in taxable income going forward may result in lower Medicare premiums and the amount of Social Security benefits that are subject to income tax. Additionally, heirs may inherit the full amount of the Roth IRA and typically not be subject to tax at their possibly higher tax rate.

Managing Taxes on Converted Funds

So why not convert those tax-deferred investments to a Roth IRA? One drawback that some may cite is the taxes that will be owed on the converted amounts. But the overall benefits of a Roth IRA may overcome those drawbacks through proper management.

To help ease the tax burden, you may want to consider recommending:

Partial Conversions

Converting a traditional IRA to a Roth IRA doesn’t need to be an all-or-nothing proposition. While assets that are converted are subject to ordinary income tax rates, your client can spread out those tax payments over a few years to soften their impact.

If a client is at the lower end of an income bracket, they may convert enough to max out their tax bracket each year so as not to jump into another income bracket.

Partial conversions can be a complicated strategy with tax situations changing every year so you will want to work with a client’s tax preparer whenever possible before implementing.

Converting Larger Amounts During a Market Decline

Investors certainly shouldn’t base their decision to convert an IRA on how the market is performing. However, when asset values are temporarily low, larger amounts may be converted while receiving the same tax bill as if converting a smaller amount during up markets.

In other words, converting to a Roth IRA in down markets is typically less expensive. For example, prior to the market downturn in early 2020, a $1 million IRA balance would have paid approximately $41,000 more in taxes to convert to Traditional IRA than just a month or two later when markets, and therefore the investment account balance, were temporarily lower.2

Recent market volatility has likely spawned some interesting conversations with your clients as they assess their retirement strategy. Implications of an IRA conversion may seem complex, but the team at CUNA Mutual is available to help you navigate these types of retirement income strategies. Visit our Elevate Advanced Planning Resources page for helpful information and guidance on how to address complex investment scenarios.


Marshall Heitzman
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™

Marshall is CUNA Mutual Group's Head of Advanced Planning and has more than 25 years experience in the insurance and financial services industry. He consults Financial Advisors on advanced retirement planning concepts for retirement and wealth management clients.

1IRS, Retirement Plan and IRA Required Minimum Distributions FAQs, June 3, 2020, Here’s why a Roth IRA conversion can make sense in this down market, March 6, 2020


Topics: Advanced Planning