Author’s note: I first wrote this article when I was still serving financial planning clients. While I no longer do so, I still believe these to be important questions anyone should ask when implementing a Roth conversion strategy.
When you create your Roth IRA conversion strategy, it might be tempting to just ‘set it and forget it.’ However, a Roth conversion strategy might take years to actually implement, particularly for people who have large IRAs they’re trying to convert.
During this time, a lot of changes might happen which might impact the way you implement your strategy. At least, things might happen which might cause you to ask yourself, “Am I still doing the right thing here?”
While we think that it’s important to review your tax planning each year with either your financial advisor or your tax professional, there are still questions that come up outside of those meetings.
Below are 9 of the common questions that we’ve discussed with clients as we’ve helped them with their Roth conversions.
Question #1: Do I really need to look at my taxes each year?
This is a common question, particularly for people who feel their personal situation is very stable from year to year. And yet, many of our most ‘stable’ clients truly used to appreciate the validation that comes from ensuring things haven’t significantly changed.
For them, it was always worth that 30-45 minutes of:
- Going through their tax return
- Doing a tax projection, and
- Accounting for any changes that might have happened
Because if nothing’s changed, there’s a peace of mind in affirming this. But if something did change, there usually is a big relief in knowing that we can account for it and make adjustments.
Being proactive means having to be less reactive.
Question #2: What if my income changes?
If your income changes in a way that you didn’t anticipate when you first started, it’s important to take this into account. And why would your income change? It could be for any number of reasons.
If you’re on a pension, perhaps your cost-of-living-allowance (COLA) changed more dramatically than you expected.
Or perhaps you chose a different survivor benefit than you had planned, which changed the amount of your actual pension.
Some people have a truly fruitful and enjoyable retirement without ever having to earn another dime. Perhaps they follow a passion, a hobby, or just find something of interest that they find fulfilling.
And some people don’t.
A couple of months into retirement, after their to-do list is fully checked off, they’re climbing up the walls looking for something to do. And many people who’ve spent 30, 40, or 50 years in the workforce, they find relief in just going back to work part-time.
Perhaps you decided to take your part-time hobby and make some money from it. You might not have ever expected it to make you money, but it has.
And as this happens, you might have questions on what this might do for your taxes.
Perhaps you bought some new investments that are paying you more in dividends or interest (or less) than you were used to.
All of these are changes that might occur over time, but suddenly cause you to second guess yourself when you realize them.
There might also be very deliberate decisions you make, that you weren’t aware of, or that you hadn’t anticipated when you first created your Roth conversion strategy.
Question #3: How do changes in my investments affect my Roth conversions?
There are a couple of ways capital gains might affect your Roth conversion. Let’s take a closer look.
What if I sell XXX investment in my taxable investment account?
Perhaps you needed some money on short notice. Maybe you just wanted to get out of a bad investment. Or you wanted to take some money ‘off the table’ before your investment lost value.
The good news is that a one-time sale will probably only impact that year’s Roth conversion. Or more correctly, the taxes you might owe as the combined result of selling the investment AND doing the Roth conversions that year.
If you’re looking at trying to figure out which one you should do, then your financial advisor or tax professional should be able to help you make a decision you’re comfortable with.
What if my accounts have increased?
When you put together your Roth conversion plan, you’re thinking about your account balances at that time. If you’re 5 years into executing your plan, your account balances might be drastically different from when you initially started.
If your portfolio has done well, you might not be drawing your balances down as quickly as you had planned, which means you might have more to convert than you thought.
What if my accounts are down?
If the market hasn’t done as well as you had anticipated, then that might actually be an opportunity.
Doing Roth conversions in a down market might actually help your strategy, because you’re able to convert more shares of your investments for the same dollar amount as you would have in a normal market.
Then, when your investments recover (assuming they do), your ‘rebound’ growth is now tax-free in your Roth account.
Question #4: How does my Social Security decision impact my Roth conversion strategy?
When to take Social Security
You can decide to take Social Security at any time between age 62 and 70, with the understanding that your monthly payment increases roughly 8% per year.
You can opt into Social Security after age 70, but there’s no benefit in doing that as your monthly payment doesn’t increase.
Spousal benefits of Social Security
If you’re married, there are complexities as to whose benefits you select. You could take spousal benefits or your own benefits. There are other complexities, but that might be beyond the scope of this article.
Social Security taxability
Not all Social Security benefits are taxable. Depending on your income level, you might find that:
- 0% of your Social Security is taxed
- 50% of your Social Security is taxed
- 85% of your Social Security is taxed
But never 100%.
Of course, the longer you delay taking Social Security, the more flexibility you give yourself in your Roth conversion plan.
Question #5: What if I need to start taking money from my IRA for living expenses?
What if you had decided that you don’t need your IRA to support your income, but then changed your mind? Your IRA withdrawals have two effects:
- In the current year, your income will go up by the withdrawal amount
- In future years, there will be a smaller IRA balance to worry about
Of course, the opposite is true. Perhaps you had planned on IRA withdrawals to support your lifestyle and Roth conversions. In that case, giving up the withdrawals because you don’t need the money simply gives you a little more flexibility.
Question #6: What if I become a widow(er)?
This is probably one of the most common things we see in our recently retired clients. People who have recently retired usually do plan for their eventual passing, but they’re young enough to be taken by surprise if it happens to them.
While there is a ‘numbers’ impact to this (such as change in filing status), the more important thing to consider is that losing your spouse is such a traumatic event that most people put everything on hold that isn’t absolutely important.
And while it would be nice to keep your portfolio tax-efficient, Roth conversions certainly take a back seat to virtually everything a recent widow(er) is going through.
In fact, it takes about a year (at the very least) for a widow(er) to have:
- Completed all the ‘immediate’ tasks related to losing a loved one. This might include things like:
- Funeral arrangements
- Closing out the estate
- Filing the decedent’s final tax return
- Made enough strides in the grieving process to focus on major decisions
- Recognized ‘down the road’ challenges that have taken a back seat
Along the way, it’s not uncommon for things that were very important to have lost their value, which might in turn require a complete re-thinking of this strategy.
Question #7: What if the tax code changes?
We can speculate on this until the cows come home. But from 2017 to 2020, there have been 3 major tax reform laws passed:
- The Tax Cuts and Jobs Act (TCJA) of 2017
- The Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020
It’s not unrealistic to expect a future tax law change to impact your Roth conversion strategy.
However, your tax-focused financial advisor should be on top of those changes so you don’t have to stress about them. And if there is a material impact, they’ll help you address it.
Question #8: What if my retirement goals change?
It’s your retirement. It’s your money. It’s certainly your choice.
And as you move through life, things that are important to you will change. But most people usually stay true to their values—those usually don’t change.
And most of the time, your retirement changes will probably not be so disruptive that it blows up your entire Roth conversion strategy. Having periodic conversations with your financial advisors will help you affirm or make slight changes to your retirement goals over time.
Question #9: There’s something big that I didn’t account for when I put together my plan. What do I do about it?
Sometimes, you just didn’t see it. It could have been an oversight, or it could have been something that you couldn’t have ever anticipated.
Whatever it is, sometimes you just have to make adjustments and move on. Or redesign the Roth conversion strategy with new assumptions. That’s okay.
This article was written after serious thought about questions asked by clients we’ve helped with their Roth conversion strategy. There is no ‘right’ or ‘wrong’ answer.
But it doesn’t mean that this question isn’t worth exploring. Perhaps you come to your right answer only after taking some time to really think about how this might play out.
After retiring from a 24-year career as a Naval officer in 2017, Forrest became a financial planner to help people achieve success in managing their personal finances. In 2022, he sold his partnership stake in his financial planning firm to focus on helping people full-time through his writing.
Featured in: Forrest’s writing has been featured in the following publications: Forbes, Military.com, NerdWallet, Yahoo Finance, The Military Guide, The Military Wallet, Christian Science Monitor, and many other publications.
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