Are You Making the Right Roth Conversion Moves?

Roth conversions let you transfer assets from regular IRAs, 401(k)s, and 403(b)s to their Roth counterparts. These conversions are taxable. But Roth assets grow tax free and aren’t taxed on withdrawal. Plus, Roth withdrawals do not trigger Social Security benefit taxation or Medicare Part B IRMAA taxation. Roth conversions also limit tax uncertainty, reduce future Required Minimum Distributions (RMDs), and facilitate tax-advantaged bequests of Roth balances. MaxiFi’s Roth Conversion Optimizer calculates how much to convert annually based on precise projections of federal and state income taxes, taxes on Social Security benefits, Medicare IRMAA taxes, and RMDs.

Converting more this year means higher current, but lower future taxes. Current conversions also impact gains from future conversions. Thus, an optimal conversion strategy requires simultaneously deciding how much to convert this year and in all future years. Moreover, conversions can change taxes abruptly by putting you in higher or lower federal-income, state-income, and IRMAA tax brackets as well as alter the taxation of Social Security benefits. In short, federal income taxes are only part of the picture and converting only when federal income tax brackets are low is rarely optimal. Remarkably, making large-scale conversions early on, even at the cost of paying federal income taxes at the highest rate, may produce major future tax savings by dramatically lowering future brackets.

With optimal Roth conversions, one size fits none. Your age, spouse’s age (if married), longevity, wages, retirement dates, Social Security collection strategy, and levels of regular and retirement assets all matter. So do future tax changes, your Roth withdrawal strategy, and the state income taxes you’ll face in retirement. Finally, paying higher immediate taxes can cause cash-flow problems limiting the conversions you can sustain.

Reducing lifetime taxes via Roth conversions permits higher lifetime spending with the timing of increased spending depending on cash-flow constraints. But a household’s spending path affects its current and future asset accumulation which then affects taxable asset income and taxes. Thus, Roth conversions impact taxes, which impact spending, which impact taxes, and on and on. Mathematically, optimal Roth conversion is a highly non-linear, simultaneous equations problem requiring MaxiFi’s advanced algorithms to get right.

Each household’s optimal conversion strategy is unique and for some, Roth conversions may not help. But applying MaxiFi’s Roth Conversion Optimizer to a range of alternative test cases produces surprising findings. For many households, early conversion of all or virtually all regular IRAs, Roth-convertible 401(k)s and 403(b)s, as well as other tax-deferred assets is the winning strategy. Yes, doing so means far higher tax brackets early on. Yet, the tax reductions from much lower future taxes can produce, on balance, lower lifetime taxes. Converting on a large scale can make these tax reductions substantial.

Check out our detailed Roth Conversion Optimizer case study on our website. It walks you through real-world scenarios showing the substantial tax savings and increased retirement spending achievable through strategic Roth conversions.

Absolutely, the Roth optimizer is just one feature of the comprehensive MaxiFi software. When you purchase MaxiFi, you gain access to a versatile tool designed to assist you in making informed financial decisions throughout different stages of life. Whether you are far from retirement or already retired, MaxiFi lets you experiment with various life scenarios and compare their impacts on your living standard. Here’s how MaxiFi can help you manage a wide range of financial decisions:

• For those not near retirement:
  • Taking a new job
  • Having a child
  • Buying a home
  • Moving to a different state
  • Paying off student loans
  • Deciding how much to spend and save each year
  • Determining the right amount of life insurance





• For those nearing retirement:
  • Deciding when you can afford to retire
  • Choosing the best time to apply for Social Security benefits
  • Determining when to start taking withdrawals
  • Exploring whether to reduce to part-time work before retiring
  • Evaluating whether to move or downsize your home
  • Deciding whether to sell assets before retirement

• For retirees:
  • Downsizing your home
  • Purchasing long-term care insurance
  • Postponing Social Security benefits
  • Continuing to buy life insurance
  • Paying off your mortgage
  • Exploring different investment and spending strategies
  • Adjusting retirement account withdrawals
  • Supporting a child or grandchild's education or other needs
  • Changing the order of withdrawal from retirement accounts
  • Moving to a different state
  • Annuitizing parts of your 401(k)

By investing in MaxiFi software, you can evaluate these and other financial decisions, clearly seeing how each choice might affect your financial future and optimize your strategy accordingly.

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Most other financial planning software companies have other ways of making money, usually by managing and investing your assets or selling you financial products such as life insurance. Our sole focus is developing personal financial planning software to provide you with a solid, detailed financial plan you can trust.   The free tools also use simplistic, outdated "rules of thumb" and lack precision when it comes to crucial aspects of your plan, such as Social Security benefits and state taxes. Because our focus is on planning, we constantly work to improve the power and accuracy of our software.

At Economic Security Planning, Inc., we don’t sell, recommend, or advertise any financial products, nor recommend particular financial advisors. This allows us to focus strictly on providing the best financial suggestions.