05 Aug What’s the best strategy to convert my 401(k) to a Roth IRA?

Q. I’m 65 years old and I’ve been retired for three years. I receive a company pension, Social Security and income from a rental property. Is it wiser for me to convert all of my 401(k) savings into my Roth account? Or should I average out the conversion over five to seven years.
— Retired

A. Congratulations on your retirement.

We’ll go over the basics here, but we highly recommend you work with a tax professional before you do a Roth conversion.

That’s because the decision to complete a Roth conversion is irrevocable.

The Tax Cuts and Jobs Act (TCJA) eliminated so-called recharacterizations of Roth IRA conversions made in 2018 or later, said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

“Recharacterizations were previously a means to reverse a Roth conversion for those individuals that later determined that they were over the conversion income limits,” he said. “It became an abused loophole in the tax code and was closed.”

Eliminating recharacterizations has changed the strategy related to Roth conversions, Green said.

One of the main factors in deciding when, or if, to complete a Roth conversion is your tax bracket. The funds involved in a Roth conversion will be counted as income for the year in which the conversion takes place, and will be taxed as such, he said.

Miscalculating the amount you should convert can potentially bump you into a higher tax bracket and cause you to pay more in taxes than you anticipated, he said.

Spreading out the conversions over several years can help reduce the risk of this occurring, he said.

Without knowing your specific tax situation, we can’t give a specific recommend on how or if you should do a conversion.

In general, though, it makes more sense for some to complete a Roth conversion in one year if the tax circumstances are more advantageous to do so, Green said.

There are other factors to consider, though, including whether a Roth conversion would impact your Medicare Part B and Part D premiums, he said.

The most favorable time of year to complete a Roth conversion has also changed, and may make a difference in the outcome of the conversion, he said.

“Previously, it made more sense to complete the Roth conversion as early in the year as possible,” he said. “This would allow you the most time to decide if you should recharacterize the conversion before the end of the year.”

But now, waiting until later in the year is likely more beneficial when income and deductions can be more accurately projected, Green said. Some may consider a “barbell” approach, where they complete part of the Roth conversion early in the year, and the rest later in the year when they know their tax circumstances better, he said.

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This story was originally published on Aug. 5, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.