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Roth Conversions, Retirement Planning Wizardry

The years immediately following retirement provide a time-sensitive opportunity to unlock tax savings by executing strategic Roth Conversions from tax-deferred accounts to Roth accounts.

What's a Roth Conversion?

Simply put, you pay taxes now in order to avoid more taxes later.

 Take the example below.

 Arthur and Molly Weasley have faithfully saved for their retirement, accumulating $1.5MM of tax-deferred assets.

 Sounds nice, right? Not so fast.

 A portion of that nest egg is actually earmarked for taxes. With no Roth Conversion strategy, and a 24% tax rate, nearly $2MM will go to taxes over a 29-year retirement.

In a Roth Conversion, you shift money from your tax-deferred account (401(k), IRA) into a Roth account where it grows tax-free.

The catch is that you pay taxes on that conversion now. So, the idea is to convert enough that you fill up lower tax brackets, but not so much that you get into higher tax brackets.

That's why the years immediately following retirement, before you start RMDs, are the opportune moment.


Pay more taxes now? Is that really worth it?

Absolutely. Let's look again the Weasleys.

In this example, the Weasleys decide to execute strategic Roth Conversions up to the 22% bracket over the first handful of years in their retirement.

From the graph below, you can see this causes them to pay more taxes early on in retirement than they otherwise would have done.

But beginning in 2032, they start seeing tax savings. And that amount of tax savings increases every year after that throughout their retirement.

Just how valuable are Roth Conversions?

The stats below highlight the value for the Weasleys over a hypothetical retirement of ~30 years.

 Reduced average tax rate, reduced total taxes. Increased total net income. Increased net legacy.

 Of course, not every situation will produce this much savings. These people are wizards, after all 😊.

 Then again, other situations will produce even more benefits than this. Your individual circumstances matter.

 If you're curious about whether this could be beneficial to you, check out this decision-tree flowchart below.

While strategic Roth Conversions involve upfront taxes, they can significantly boost your retirement savings by allowing your money to grow tax-free.

Consider a Roth Conversion if you're in a lower tax bracket now and expect to be in a higher one later in retirement.