News and Commentary

Is now a good time for a Roth Conversion of your Retirement Savings? By Lee F. Hediger

As the Biden Administration crystalizes its campaign promise of tax reform, one thing is clear: there is a likely chance that wealthy taxpayers will pay higher taxes on income and investments in the future. Preparing for this potential shift requires efficient estate planning and nimble execution.

The current administration calls for increasing the top income tax rate to 39.6 (from 37 percent) for taxpayers making more than $400,000 annually, although it is not clear if that income threshold applies to individuals or married couples filing joint tax returns. Additionally, there is talk of increasing the capital gains rate for households making more than $1 million a year to 39.6 percent (from 23.8 percent) and changing the deduction currently available for contributions to traditional IRAs and 401(K) plans to a tax credit equal to a portion of the contributed amount.

Individual retirement accounts (IRAs) and 401(k)s serve an important purpose in estate planning, helping individuals begin saving today, when they are young, for a financially secure retirement in the future. Contributions made to these plans today reduce your taxable income in the year of contribution and grow tax-deferred until you take distributions in retirement. However, with tax rates currently at historic lows and the prospect of higher taxes in the near future, now may be the ideal time to consider converting all or a portion of these plans into Roth IRAs or Roth 401(k)s.

With Roth retirement plans, you pay taxes on your contributions and allow your savings to grow tax-free and be taken as distributions free of taxes in retirement. Participation in these plans generally is restricted based on a taxpayer’s modified adjusted gross income (MAGI). For example, contributions to a Roth IRA in 2021 is limited to individual taxpayers with MAGI of less than $140,000 (or $208,000 for married filing jointly.) Consequently, Roth IRAs and Roth 401(k)s are commonly used by young investors in low-income-tax brackets who are just starting to earn wages. However, older and wealthy investors can also reap the rewards of tax-free distributions in retirement through a Roth conversion or back-door Roth.

Converting a traditional IRA or 401(k) to a Roth IRA or Roth 401(k) is a fairly simple process, but it also requires account owners to pay tax on the transferred amount at the time of the conversion. This means you would need to pay back any tax deductions you took on contributions and any investment gains earned in your traditional account before the conversion. While the tax liabilities from a Roth conversion today may be substantial, they are still less than you would pay on distributions from a traditional IRA or 401(k) taken later in life when the capital gains rate is nearly double what it is today.

Alternatively, high-net-worth-investors can receive all the tax benefits of a Roth IRA and get around income limitations by opening and immediately funding a traditional IRA that you rollover or transfer into a Roth IRA and pay any related tax liabilities. For example, if you opened an IRA account with $6,000 in 2020 and covert it to a Roth IRA, you will have to pay taxes on that initial $6,000 as well as all investment gains earned before the conversion. You should also be aware that the IRS will treat the converted amount as income, which may put you into a higher tax bracket.

The good news is that you can plan for these tax liabilities that come with backdoor Roths and Roth conversions when you meet with experienced financial advisors who can not only provide you with estimates of your potential tax savings and tax liabilities but also help to ensure that such action fits within your larger estate planning needs and goals.

About the Author: Lee F. Hediger is a co-founding director and chief compliance officer with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email

 Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Lee F. Hediger is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors.

 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. Please note, changes in tax laws may occur at any time and could have a substantial impact on each person’s situation. While we are familiar with the tax provisions 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.

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Posted on June 17, 2021