Converting pre-tax funds into a Roth account can potentially reduce your tax burden in retirement. Roth IRAs offer unique benefits that differ from traditional tax-deferred accounts.

While you pay taxes on contributions upfront, qualified withdrawals are completely tax-free, including the growth. You can even pass on your Roth assets to your heirs, and their withdrawals will also be tax-free.

But how do you know if a Roth IRA conversion is the right strategy for you? In this week’s Retire Wiser with NBC Connecticut, Joel Johnson, CFP® shares key considerations to help you decide.

When Do You Need the Funds?

You must wait five years from the tax year of your first Roth IRA contribution before your earnings qualify for tax-free withdrawal. Think about it, does it make sense to pay taxes on a Roth conversion if you haven’t given the money enough time to grow? If you’re not at least five years away from needing those funds, a Roth conversion may not be the best move.

Do You Expect to Be in a Higher Tax Bracket?

If you expect to be in a higher tax bracket in retirement, a Roth conversion is certainly worth considering. This approach allows you to convert and pay taxes on your money now while you’re in a lower tax bracket. In the future, you can withdraw those funds tax-free.

Plus, by holding both Roth and pre-tax retirement accounts, you gain flexibility in retirement. You can strategically withdraw money from the account type that best manages your tax liability in any given year.

Do You Want to Lower Future RMDs?

Another benefit of Roth IRAs is that they don’t have required minimum distributions (RMDs) during your lifetime. This allows your investments to grow tax-free for as long as you want. For traditional IRAs, RMDs can become a ‘tax time bomb’ starting at age 73 if you’re unprepared. Converting some of your funds to a Roth today can help reduce your RMDs and ease your future tax burden.