Roth conversions are one of the most talked-about retirement planning strategies today. Some investors swear by them, while others aren’t sure whether they are worth the tax bill.

A Roth conversion is done when an investor moves money from a Traditional IRA to a Roth IRA and pays income tax on the amount converted. People tend to think of Roth conversions as a positive thing, and some folks will even try to convince you that Roth conversions are the big secret to amassing wealth. As it turns out, it’s not that simple.

There are a number of factors that help determine whether or not a Roth conversion is advantageous to a particular investor. In order to fully understand these factors, we need to first remember how a Roth IRA differs from a Traditional IRA.

With a Traditional IRA, you may be able to deduct your contribution from your taxable income. This money then grows tax-deferred until you withdraw it in retirement. A Roth IRA essentially works in reverse—pay your taxes up front, invest the money, and never pay taxes on it again, assuming that you follow IRS guidelines.

The simplest way to determine if there is any advantage to doing a Roth conversion is to ask the question: is my tax rate higher now than it is likely to be in the future, when I might need to use my retirement funds? If your tax rate is higher now than you expect it to be in retirement, you can keep the money in your IRA tax-deferred and then take it out later, when your tax rate is lower. If your tax rate will be higher later, you may want to convert to a Roth IRA and pay what could be a lower tax rate.

If you can’t predict what your tax rate will be in the future, some other factors can guide your decision.

Do you have money outside of your retirement accounts that you can use to pay the taxes on your conversion? If so, that usually makes it more financially advantageous to do a conversion.

Medicare rates (IRMAA) are closely tied to your adjusted gross income (AGI). Roth conversions before retirement can help reduce future taxable withdrawals from traditional retirement accounts, which may help keep your AGI lower in retirement. Just be aware that the government looks 2 years back at your AGI in order to determine your Medicare cost, so any Roth conversions within 2 years of signing up for Medicare could increase your costs temporarily.

Another important point related to retirement income is that Roth conversions can help reduce future Required Minimum Distributions (RMDs) from your Traditional IRA. That may help retirees manage their taxable income later in life.

Finally, I will note that Roth IRAs are excellent estate planning vehicles. Your heirs can generally withdraw money from an Inherited Roth IRA without paying income taxes on it, which is a huge benefit.

As you can see, there is nuance to the appropriateness of a Roth conversion. Even if you do determine that a Roth conversion is a good idea, you have to be careful not to convert so many dollars in a single year that you accidentally rocket yourself into a higher tax bracket and pay more taxes than necessary! Your CPA, Financial Advisor, or a good tax calculator should be able to help you with that.

However you choose to save for retirement, invest smartly and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.