When the new tax law was passed, it included a provision that got rid of recharacterizations of ROTH conversions. The rule used to state that if you converted an IRA into a ROTH, and then wanted to reverse that decision, you had until the due date for your tax return (including extensions) to do so. I have heard a lot of people talk about shying away from the idea of a ROTH conversion since the passage of the new law. Yes, it reduces our flexibility when dealing with conversions but ROTH conversions can be part of an overall tax strategy that can add up to 7.5 years to your portfolio’s longevity¹.

Overall, a ROTH conversion is the process of moving assets from your IRA (pre-tax) to your ROTH (after tax) and paying the tax in the year of the conversion. A person is likely to change tax brackets throughout their lifetime. An individual could start working at a 10% bracket, get a promotion and move up to the 12%, then another and be at the 22%, retire at 62 and drop to the 12%, then at 70 ½ must start taking their Required Minimum Distributions and move back up to the 22% bracket. These are the scenarios that I dream about as a Financial Planner, as there is opportunity to save thousands of dollars in taxes. Most people’s goal is to delay paying taxes as long as possible but I believe your goal should be to pay the least amount of taxes over your lifetime.

In the scenario above, at retirement the individual would want to start converting as much of their IRA assets into their ROTH as they could and still stay in the 12% bracket. To incorporate this strategy successfully we have to use some projections and estimates, as well as navigate income thresholds for Social Security tax and Medicare surcharges. If you are like most people and your tax bracket will change over your lifetime, keep a ROTH conversion in mind and remember that you don’t always want to delay paying taxes, you want to pay the least amount of taxes.

¹Cook, Kirsten, Ph.D., William Meyer, and William Reichstein, Ph.D, 2015. Tax-Efficient Withdrawal Strategies. Financial Analysts Journal, Vol. 71, No. 2 (March/April 2015), pages 16-29.