Using ROTH conversions to lower your family taxes! A Strategic Guide to Roth Conversions

Roth IRA Conversions: A Strategic Tool for Reducing Lifetime Family Taxes

A Roth IRA conversion can be a powerful planning strategy for clients who want to reduce long-term taxes, increase flexibility in retirement, and transfer wealth more efficiently to the next generation. By converting pre-tax retirement savings into a Roth IRA, investors pay taxes today in exchange for tax-free growth, tax-free withdrawals in retirement, and the elimination of Minimum Distributions. When used thoughtfully, a Roth conversion can also reduce the tax burden on heirs, which is a benefit many people overlook.

Here is a scenario that highlights the opportunity. Imagine you are fully retired, your living expenses are covered, and the only reason you take withdrawals from your IRA is because RMDs force you to. Ultimately, these IRA assets will pass to your heirs and will be taxed at their income tax rates once withdrawn. If your children are successful professionals, they may be in much higher tax brackets than you are today. Under current rules, they must withdraw inherited IRA assets within ten years. If you have already begun your RMDs, they must also take annual Beneficiary RMDs during that period. This combination can create a substantial tax bill for them.

One way to manage this is by converting a planned portion of your Traditional IRA to a Roth IRA each year. You pay the taxes now at your own rate, instead of your heirs paying at theirs later. Once your heirs inherit a Roth IRA, their withdrawals are tax free, and the account can continue growing tax free throughout the ten-year period. In effect, you shift the tax burden from their higher bracket to your lower bracket, potentially creating significant multigenerational savings.

Understanding Roth Conversions

A Roth conversion transfers money from a pre-tax retirement account, such as a Traditional IRA or eligible 401(k), into a Roth IRA. You pay income tax on the amount converted, but the long-term benefits can be substantial: tax-free growth, tax-free withdrawals, and no RMDs.

Eligible Accounts

The following accounts may be converted to a Roth IRA:
• Traditional IRA
• SEP IRA
• SIMPLE IRA (after the required participation period)
• 401(k) or 403(b) when separated from service or if the plan allows in-service conversions

Key Tax Considerations

• Conversions are permanent and cannot be reversed.
  • The converted amount is taxed as ordinary income in the year of conversion.
  • Spreading conversions over several years can help control tax brackets.
  • Using non-retirement funds to pay the tax bill maximizes the long-term benefit.

Strategic Approaches

• Partial annual conversions to manage tax exposure
  • Filling up lower tax brackets each year
  • Converting during market declines
  • Backdoor Roth funding for high-income earners

Long-Term Advantages

• Tax-free compounding for life
  • Tax-free inheritance for beneficiaries
  • Greater flexibility in retirement income planning

A Roth conversion is not right for everyone, but when aligned with your tax situation, investment horizon, and estate planning goals, it can be a highly effective wealth strategy. For a personalized analysis, contact our office to discuss your options.

Raymond James Financial Services, inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

RMDs are generally subject to federal income tax and may be subject to state taxes. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. CSP 955375 12/2025