Preparing for a Leisurely Life? There's Still Time to Swap To a Roth IRA Investment Plan

In the world of retirement planning, Roth IRAs have gained significant attention due to their unique benefits. This article aims to shed light on the advantages of Roth conversions, particularly for retirees and those approaching retirement.

Firstly, it's essential to understand that Roth IRAs are retirement accounts to which you contribute after-tax dollars. Unlike tax-deferred accounts, the converted funds may take years before showing gains that put you in a better position. However, the long-term benefits can be substantial, especially in retirement, when the earnings on the amount converted can significantly benefit from potential tax rate increases.

For retirees who have not yet started drawing Social Security, Roth conversions might be a good option to consider. The five-year rule for Roth IRAs applies to the interest earned on the account, not the principal—your contributions. This means that even if you convert your account early, you can still reap the benefits of tax-free withdrawals once the account has been open for five years.

One potential advantage of Roth conversions is the avoidance of required minimum distributions (RMDs). Unlike traditional IRAs, Roth IRAs do not have RMDs, which means retirees aren't forced to withdraw a certain amount calculated by the IRS, whether they need the money or not. This can help manage income and potentially reduce tax liabilities.

Another significant advantage is the potential savings down the road. Converting to a Roth can save you significant money, possibly putting you in a lower tax bracket in retirement. However, it's important to note that when you convert pre-taxed or tax-deferred accounts to a Roth IRA, you pay income tax on the amount converted in the years you're making the transfers.

Deciding whether to do a Roth conversion depends on your income and related year-to-year tax situation. For instance, in 2025, single tax filers cannot contribute to a Roth IRA if their modified adjusted gross income (MAGI) is more than $165,000, while for married couples filing jointly, the MAGI limit is $246,000. The 2025 contribution limit for Roth IRAs is $7,000 for those younger than 50, with catch-up contributions of $1,000 allowed for those aged 50 and up.

Committing to a multiyear conversion process often makes sense for many people with plenty of working years left. For example, a gradual conversion can help prevent higher Medicare premiums, as the income from conversions is spread over several years rather than being concentrated in one year.

In conclusion, while Roth conversions may require careful consideration and the advice of a financial advisor, they can offer significant long-term benefits, especially in a climate where tax rates are at historic lows but are likely to increase in the future. As more retirees reach the age of 65—with an estimated 4.18 million Americans turning 65 in 2025—the strategic use of Roth IRAs and Roth conversions could become increasingly important for effective retirement planning.

Preparing for a Leisurely Life? There's Still Time to Swap To a Roth IRA Investment Plan