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CONTRIBUTORS

Bill Cass, CFP®, CPWA®

Director of Wealth Planning,
Franklin Templeton

There is still time to decide whether to do a Roth IRA conversion in 2024 to realize income for this tax year.

This strategy may make sense for those who are in a lower tax bracket this year or who believe taxes will increase in the future.

Another consideration is tax diversification. Having a mix of retirement savings, in the form of traditional pre-tax assets and Roth assets, may help individuals manage taxes when withdrawing funds in retirement. For instance, if you are in a lower tax bracket in a particular year, consider withdrawing more funds from a traditional IRA. Conversely, if you are in a higher tax bracket a particular year, consider withdrawing from a tax-free Roth IRA.

For those considering a conversion, an important first step is to determine, based on projected income for 2024, your marginal tax bracket. This can provide clarity on the tax "cost" of generating additional income before the end of the year. See our recent post, “Act before year end to manage your tax bill.” 

Does a Roth conversion make sense before the end of the year? Considerations

Notes: Those at higher income levels enrolling in Medicare may be subject to higher Part B and Part D premiums due to the Income Related Monthly Adjustment Amount (IRMAA). The Social Security Administration considers your tax return from two years prior to determine if a higher premium applies. Consult “Medicare and You” for more information.

The Free Application for Federal Student Aid (FAFSA) uses income information from two years prior as part of the income test in calculating student aid. 

Seek professional assistance

Voluntarily adding additional income by converting traditional retirement assets to a Roth requires careful thought and analysis. In particular, since 2018, taxpayers are no longer able to recharacterize (undo) a Roth conversion. Lastly, it’s important to understand the rules for tax-free withdrawals from a Roth (referred to as “qualified distributions”) that include a five-year holding period and one of several other requirements (for example, attaining age 59½). Consulting with an advisor and tax professional is critical.

WHAT ARE THE RISKS?

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IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

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