When Is a Roth Conversion Appropriate?
Since 1997, the federal tax code has allowed the conversion of a traditional IRA to a Roth IRA, if the appropriate taxes are paid on such a conversion. This creates long-term tax savings and other strategic opportunities for those who have oversaved for retirement in qualified accounts. The appropriateness of the decision is primarily driven by timing, the retirement of the account owner(s), the unexpected and unplanned need to raise cash, as well as the timing of the markets and value of the preconversion funds. These risks are substantial, and often unknown, therefore making them difficult or impossible to mitigate. As such, great care must be taken when converting a traditional IRA to a Roth IRA, including the coordination with heir(s) and the consultation of a tax professional who is fluent in Roth conversions and their associated risks, as well as multigenerational tax and financial planning.