With tax season upon us, many financial advisors and clients may be considering moving retirement assets into a Roth IRA account, and opt to pay some taxes now in exchange for tax-free distributions in the future.
Sharon Carson, Retirement Strategist, counsels caution. Here’s why.
A legislated timing change
The age at which retirees must begin taking required minimum distributions (RMDs) has been steadily rising as a result of the 2022 passage of the SECURE 2.0 Act. Currently, retirees can wait until they reach age 73 to begin making the legally mandated withdrawals; by 2033, retirees will be allowed to delay taking RMDs until they reach the age of 75.
From a tax perspective, this rule change raises an interesting question: Should retirees take full advantage of the extra years of tax-deferred saving and forgo Roth conversions?
The answer is yes, if their taxes will be consistently lower in retirement. However, assuming this rule of thumb will always hold true (and not looking into the details) can be a costly mistake.
Careful planning is essential to avoid the possibility of being bumped into a higher tax bracket later in life, which can happen in a variety of ways.
Personal events, such as losing a spouse, gaining an inheritance or taking RMDs from tax-deferred accounts frequently push retirees into a higher tax bracket. As Exhibit 1 illustrates, taxation of Social Security benefits and Medicare Income-Related Monthly Adjustment Amounts (IRMAA) surcharges can occur:
- For lower-income workers, retirement account withdrawals may make taxation of Social Security benefits jump dramatically
- Those with relatively high income in retirement (starting at $109,000 filing single and $218,000 filing jointly in 2025 MAGI) are likely to face Medicare surcharges.1 Also note: RMDs on tax-deferred accounts will trigger more in Medicare surcharges for a single retiree than for a couple. Thus, the implications for a surviving spouse should be carefully considered.
Among the variables for clients to consider before converting to a Roth:
- Some individuals will be in a relatively high tax bracket early in retirement due to a spouse working, so timing decisions should be made at the household level
- For clients likely to deplete Roth and taxable accounts before the end of their lives—leaving only tax-deferred accounts—Roth conversions may help avoid ordinary income taxes on the remaining assets and give them more control over their tax situation later in life
- Lower-income years may be an opportune time for a client to do a Roth conversion. This may be the case if conversions are made annually before the start of Social Security benefits
- Legacy goals may also play a part. Parents might use conversions to pre-pay taxes for high-income children who will inherit the older generation’s accounts. Conversely, it may be more advantageous to avoid a Roth conversion if a beneficiary is expected to have lower taxes than the account owner
- Charitably inclined clients planning to make Qualified Charitable Distributions (QCDs) from their retirement accounts may have less need for Roth conversions; or they may need to convert smaller dollar amounts
Clients and financial professionals should also be on the alert for conversions that may trigger Medicare IRMAA surcharges; limit subsidies for Affordable Care Act (ACA) health insurance policies; or reduce or eliminate the tax credits for those age 65 and older.2
Also keep in mind—it’s unlikely to be beneficial to convert all of a client’s traditional assets to Roth accounts. Moreover, large conversions are more likely to trigger unintended consequences. If possible, use specialized software to analyze a range of scenarios with different amounts and different timing.
To sum up
While a Roth conversion can give a client more control of their tax situation later in life, it is not a one-size-fits-all strategy.
To arrive at a conversion amount that will meet clients’ financial objectives (without their drifting into a higher tax bracket), we recommend working closely with your clients’ tax advisor(s) and using retirement planning software. The deeper your understanding of a client’s financial picture the more likely you are to provide valuable advice this tax season.
For more information, check out J.P. Morgan Asset Management’s Guide to Retirement.