If you’re a diligent retirement saver, you’ve likely heard of - and maybe even explored - executing a Roth conversion of some of your pre-tax retirement savings.

Executing the Roth conversion itself is the easy part, but trying to figure out whether or not it makes sense and will benefit your particular financial situation is the hard part - since you will voluntarily pay taxes when you convert and the conversion can’t be undone.

Rather than start converting to Roth on a whim, a thorough analysis should be done before making any decisions since a Roth conversion has risk and could end up being a very expensive mistake, but when done opportunistically, can save tens of thousands or more in taxes.

More specifically, we discuss:

• What has to happen for a Roth conversion to make sense?
• What is a Roth conversion and why do people and their professional advisors typically do them?
• What are the potential benefits that can come from a Roth conversion?
• Understanding Net Present Value (NPV) when determining whether or not a conversion makes sense
• When might a Roth conversion hurt you?

Resources:

• Access Episode Show Notes and Sign Up for the Retired·ish Newsletter
• Ask Cameron A Question!
• Blog Article: Roth 5 Year Rule
• Previous Podcast Episode: What is a Roth Conversion and Should I Consider It?
• Decision Chart: Should I Consider Doing a Roth Conversion?

 

Key moments:

(05:01) What is a Roth Conversion?

(07:50) When Does It Make Sense to Consider a Roth Conversion?

(12:30) “Net Present Value” and Why It’s Important to Understand

(15:55) Recouping The Costs of a Roth Conversion Depends on Multiple Factors

(19:25) Roth Conversions with The Fastest Pay-Off

(20:25) When a Roth Conversion Might Hurt You

(25:40) Roth Conversions Carry Risks