Converting some of your pretax retirement account to a Roth IRA is a commonly discussed topic.  While there are many schools of thought around this topic, we believe there are certain times where it is optimal for clients to consider doing this conversion.  Today, we want to explore specific situations where clients could benefit from it, and we’ll also share some general guidelines that investors can use.

To start, a Roth conversion is when an individual transfers money from a pretax retirement account (commonly a 401k or IRA) to a Roth IRA.  This transaction triggers taxation on the amount you converted from pretax to Roth.  Deciding if and when to do this depends largely on your individual circumstances and we will take you through one example where we feel it largely benefited the clients.

Case Study

Recently, our team collaborated with a retired couple, aged 68 and 66 respectively, who were not yet receiving social security benefits and had adequate post-tax assets to sustain their lifestyle. Their combined pre-tax retirement accounts amounted to over $1.1 million. After factoring in their interest, dividends, and retirement income needs, we recommended to do Roth conversions up to the amount that would keep them within the 12% federal tax bracket, as long as it remained feasible.


After analyzing the numbers, utilizing software projections and tax assumptions, we believed we could convert over $600,000 before their first RMD while staying in the 12% tax bracket and then gradually doing the rest over the following years. The older spouse accomplished a complete conversion prior to any of his RMDs, allowing for a delayed initial RMD for the couple.

The graph above illustrates the initial years’ increased tax payments in red juxtaposed with the subsequent tax savings resulting from these conversions in green. The estimated cumulative lifetime tax savings, in present-day value, totals $99,003!

Why does this work?

  • Future RMDs are lower or even mitigated which allows them to stay in a lower tax bracket throughout retirement.
  • Medicare premium increases are easier to avoid with small RMDs later in life.
  • Subsequent inheritances for their beneficiaries will have more than $1.4 million in Roth funds as opposed to qualified or taxable investments.

While Roth conversions can be a useful tool, they are not ideal for everyone.  Investors need to consider their current and future tax brackets, time horizon, retirement goals, Medicare, and Social Security impact among other considerations.  Given the complexity of tax implications and the individual nature of financial situations, it’s recommended to consult a qualified financial advisor or tax professional before making Roth conversion decisions.

Additional Note: Individuals under the age of 59.5 can do Roth conversions, but it is advised to not to do a tax withholding on the converted account. Withholding taxes in this manner triggers a 10% penalty on the withheld funds used for tax payment. Importantly, the amount transformed into a Roth is solely subject to taxation at ordinary income rates.

Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.