A Roth Conversion is a transaction whereby one takes pre-tax dollars and converts them to post-tax Roth dollars.
There are several reasons you may be considering doing a Roth Conversion, however, below are the most common:
- Low Income Tax Year - You may be in a lower tax bracket than usual, and it is an opportune time to pay taxes on your traditional dollars at a lower tax rate.
- Up-Side Investment Opportunity - You may have a tremendous investment opportunity arise where you expect significant returns and you want to pay taxes on the small amount you have now, so that your returns on the investment grow tax-free.
- Potential need to access your retirement funds after 5 years - Roth funds can be accessed tax and penalty free at any age 5 years after completing a roth conversion - so you don't have to wait until 59 1/2!
- You may be nearing RMD age (72) and want to avoid taking Required Mandatory Distributions - Roth IRAs are not subject to RMD.
One final thought to consider when converting to a Roth is that there are no do-overs. You used to be able to do what was called a Roth re-characterization where you could undo a Roth conversion but the ability to undo a Roth conversion was eliminated in 2018 forward. As a result, make sure you’re committed before you convert as there are no mulligans, do-overs, or re-characterizations anymore. Also, if you want the conversion to fall onto your current year tax return, then make sure you convert those sums by December 31st.
Solo 401k In-Plan Roth Conversion Form