Roth conversions can be an excellent tax planning tool, but they aren’t for everyone. While they can help federal employees lower their lifetime tax bill, there are situations when a conversion could do more harm than good. If you’re considering a Roth conversion, you’ll want to ensure it aligns with your financial situation and long-term goals.
In this article, we’ll break down the five times a Roth conversion may not make sense so you can avoid costly mistakes.
What is a Roth Conversion?
Before we dive into when a Roth conversion might not be the best move, let’s quickly review what a Roth conversion is.
A Roth conversion is the process of transferring funds from a tax-deferred retirement account—such as a Traditional Thrift Savings Plan (TSP) or Traditional IRA—into a Roth TSP or Roth IRA. The catch? You must pay taxes on the converted amount at the time of the conversion.
The primary benefit of a Roth conversion is that once the money is in a Roth account, it grows tax-free and can be withdrawn tax-free in retirement, assuming certain conditions are met. This can be a great strategy if you expect to be in a higher tax bracket in the future. However, there are times when converting to a Roth account may not be in your best interest.
1. You Can’t Afford the Tax Bill
One of the biggest drawbacks of a Roth conversion is that you must pay taxes on the amount you convert. If you don’t have the extra cash on hand to cover the tax bill, it may not be a smart move.
For example, if you’re under age 59½ and you withdraw money from your retirement accounts to pay the taxes, you could face additional penalties. Even if you have the funds, paying taxes earlier than necessary can be difficult for some to stomach. If paying a large tax bill now doesn’t sit well with you, it may be better to hold off on converting.
2. You Expect to Be in a Lower Tax Bracket in Retirement
A Roth conversion makes sense when you expect your tax rate to be higher in the future. But if you believe your tax bracket will be lower in retirement, keeping your funds in a tax-deferred account could be the better option.
For example, if you’re in a high tax bracket now but expect to drop into a lower bracket after you stop working, you might save more by waiting to withdraw your funds at the lower rate instead of converting them now at a higher rate.
3. Reuired Minimum Distributions (RMDs) Aren’t a Concern
One of the reasons federal employees consider Roth conversions is to reduce the impact of Required Minimum Distributions (RMDs). Traditional retirement accounts (TSP) are subject to RMDs starting at age 72 (or 73 or 75 for some, depending on recent rule changes), which can push you into a higher tax bracket.
However, if your RMDs are expected to be small or you won’t be heavily impacted by them, the urgency to convert funds to a Roth account diminishes. In this case, you may be better off leaving your money in a tax-deferred account.
4. You’ll Be Subject to Higher Medicare Premiums (IRMAA Surcharges)
Medicare premiums are based on your income. If a Roth conversion significantly increases your taxable income, you could end up paying more for Medicare due to IRMAA (Income-Related Monthly Adjustment Amount) surcharges.
For 2025, higher-income individuals could see their Medicare Part B and D premiums increase by $74 to nearly $500 per month per person due to higher reported income. If a Roth conversion bumps you into a higher Medicare premium tier, the additional costs could outweigh the tax savings from the conversion.
This is why tax planning is crucial when considering a Roth conversion—what seems like a smart move now could have unintended consequences down the line
5. You Have a Short Life Expectancy
The primary benefit of a Roth conversion is long-term tax-free growth. If you don’t expect to live long enough to benefit from this growth, paying a large tax bill today may not make financial sense.
Additionally, if your beneficiaries are in a lower tax bracket than you, it may be more beneficial for them to inherit a Traditional IRA and pay lower taxes on withdrawals rather than having you pay the taxes upfront with a Roth conversion.
Final Thoughts
Roth conversions can be a powerful tool for reducing taxes over your lifetime, but they aren’t a one-size-fits-all strategy. Before converting, consider:
- Whether you can afford the tax bill.
- If you’ll be in a lower tax bracket later.
- Whether RMDs will be a problem for you.
- How the conversion will affect your Medicare premiums.
- If you have enough time to benefit from tax-free growth.
If you’re unsure whether a Roth conversion is the right move for you, consulting with a Certified Financial Planner™ who specializes in federal benefits can provide clarity and help you make an informed decision. Visit CreateYourPathFP.com to explore our services, review our transparent fee structure, and schedule a free consultation today.
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