Is a Roth Conversion Right for You or Just a Costly Mistake to Avoid?

It's common financial knowledge that converting a traditional IRA or 401(k) to a Roth IRA makes sense for many people in the long run. After all, the promise of tax-free growth and tax-free withdrawals in retirement—with no Required Minimum Distributions (RMDs)—is a powerful one.

So why don't more people do it?

The answer is simple: The immediate tax bill can be shocking, and the path to recovery can feel impossible.

The hard truth is that a Roth conversion isn't always the answer. The penalty for a poorly timed or executed conversion can be an immediate drop in your account value that takes a decade or more to recoup.

The Pain of Conversion

Consider a retired client like "Keith," a 60-year-old with a $3 million 401(k) who wanted to eliminate RMDs on a portion of his assets.

For his situation, the tax bill for this conversion is estimated at $1 million! This kind of tax hit leaves the account balance immediately reduced—in Keith's case, to just $2 million.

Imagine that hefty tax bill represents a 33% loss of your principal (the converted funds) that you have to make up. What kind of gain would you need the following year just to break even and get back to where you started?

The answer is a staggering 49.25% gain!

• How is a 60-year-old in retirement—who should be investing in a more all-weather portfolio—supposed to generate a 49.25% return?

  
  

• If Keith assumes a historical 6% annual return, it would take almost 10 years just to recover the full $1 million he paid in taxes and the lost interest. That's about a decade of lost interest-earning power spent climbing out of a tax hole.

Is There a Smarter Alternative?

If you're nearing or in retirement, the prospect of taking a massive tax hit and losing close to a decade of compounding to get back to even is enough to halt any conversion plan. You want to reduce taxes and maximize tax-free income, but without the extreme risk.

The good news is that there are tax-smart alternative planning methods that may make more sense for people like Keith.

A smart alternative strategy may allow you to:

• Maintain interest earning power on the funds you would have otherwise paid for conversion taxes.
  

• Minimize tax risk throughout retirement.
  

• Create a financial "buffer" that can be tapped for income during market downturns, allowing your equity portfolio time to rebound.

  
  

These alternative strategies are designed to help you avoid realizing a major up-front loss and spending years making up for it just to get back to even.

Ready to Explore a Better Outcome?

If this issue resonates with you, and you're wondering if a Roth conversion is truly the right—or only—path for your retirement, we can help.

Click the link below to schedule a 30-minute discovery call with us today. There is no cost and no obligation; we'll simply explore whether an alternative tax-smart strategy might work better for your unique situation.

https://calendly.com/sean-trianglefinancialstrategies