Who doesn’t love tax-free income? When you retire with assets in a Roth IRA or Roth 401(k), you will be able to take retirement income from these accounts without getting hit with income taxes. That being said, there are a few tax planning strategies to make the most of your Roth conversions.

As we see a huge market sell-off under the threat of a trade war (among other economic threats) from President Trump, now could be a great time to consider doing a Roth Conversion with some of your 401(k) or other IRA funds. If a man can bankrupt a football league, let alone numerous casinos, he should have no problem tanking an economy.

By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

What Are The Benefits Of Converting A 401(k) To A Roth IRA?

If you don’t need to access the money in your retirement account for some time, you could benefit from converting your 401(k) to a Roth IRA. The big downside is that you will owe income taxes on the money converted from your 401(k) to a Roth IRA. However, the money in your Roth IRA will be able to grow tax-free and be withdrawn tax-free when you are retired.

There are ways to make the process of a Roth conversion less taxing.

What Are Some Examples Of The Best Times For The Roth Conversion?

1. When You Have A Relatively Low-Income Year

I’m a financial planner in Los Angeles and Palm Springs, and many of my clients are in the entertainment industry. To say their incomes can vary is an understatement. With strikes bringing the entertainment industry to a near standstill in 2023, many people earned less than is typical in 2023. That year could have been a good time for many people in the entertainment industry to do a Roth conversion.

During that time, a couple I know was taking a year-long sabbatical. With virtually no earned income for the year, they decided to do a reasonably large Roth conversion to fill up some of the smaller tax brackets. They did this knowing that they would be back to work in much higher tax brackets while working. Likewise, they also expected to be in high tax brackets in retirement as well.

2. Between Retirement And Needing To Take Required Minimum Distributions

Many retirees are in relatively low tax brackets at the beginning of retirement. This is especially true before retirees elect Social Security and the required minimum distributions begin. If this sounds like where you are in life, you should consider converting enough of your 401(k) to a Roth IRA each year to take advantage of the full standard deduction. The standard deduction for 2025 is $15,000 for individuals or $30,000 for married couples filing jointly. If you had no other taxable income, a couple could potentially convert $30,000 from a 401(k) to an IRA tax-free. You could convert another $23,850 and stay in the 10% federal tax bracket.

3. When You Expect To Be In A Higher Tax Bracket In The Future

Generally speaking, I expect taxes to be higher in the future. Remember that this doesn’t necessarily mean your taxes will be higher. With proactive tax planning and perhaps some smart Roth Conversion, your taxes may personally be lower in the future, regardless of overall tax brackets.

If you expect to have a higher (taxable) income in retirement than you do now, you could benefit from Roth conversions. Three scenarios where a Roth conversion could be beneficial would be if you go from being self-employed with various tax-planning strategies helping you minimize your taxes today, you will lose some major tax deductions when your home is paid off, or your children are no longer dependents.

4. Before Moving To A Higher Tax State

I am writing this article in Palm Springs, a place many people move to in retirement. If the move was from a state with taxes lower than California, making Roth conversions before becoming a resident here could make tax-planning sense. The opposite is true for people moving from a high-tax to a low-tax state; putting off Roth conversions could make sense.

Why Are These The Best Times To Convert A 401(k) To A Roth IRA?

When doing Roth conversions, you want to do a few things to pay less in taxes over time. You want to do Roth conversions when you can realize the income from your 401(k) or IRA at lower income rates than you would have otherwise, thereby increasing tax-free retirement income in the future. The times listed above will likely be the best time to convert some of your 401(k) balance to a Roth IRA.

For most people with sizable retirement accounts, a Roth conversion strategy will occur over several (or even many years). It would be rare for someone to convert all their retirement accounts in one tax year.

Tax Diversification For Retirement Income

You don’t need to convert your entire retirement account into a Roth IRA to optimize your retirement tax savings. It is often good to have a combination of accounts with different taxation, such as traditional IRAs, 401(k)s, and Roth IRA accounts. The diversification of taxation will allow you the most flexibility to keep as much of your income as possible in the lowest income tax brackets in retirement.

Should I Contribute To A Roth IRA or Do A Roth Conversion?

For those still working, you should maximize your Roth contributions before doing Roth conversions. With the relatively low Roth IRA contribution limits and the income restrictions, ideally, you would make Roth contributions when eligible.

Roth conversions can be a great tax planning strategy for Gay couples, who tend to live in high-tax states and have above-average incomes. Talk with your fabulous LGBTQ+ financial planner to see if a 401(k) to Roth Conversion could help you pay fewer taxes.

DAVID RAE, CFP®, AIF® is a Los Angeles-based financial planner with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post, and Forbes, not to mention numerous TV appearances.  He helps intelligent people across the USA achieve their financial goals.  For more information, visit his website at www.davidraefp.com

Is Your Financial Advisor Giving You The Best Tax Planning Advice?