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5 Reasons to Avoid a Roth Conversion in Railroad Retirement Thumbnail

5 Reasons to Avoid a Roth Conversion in Railroad Retirement

Video Retirement Financial Planning Taxes


Maybe you shouldn't do that Roth conversion in railroad retirement.

Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors. Today we're going to talk about Roth conversions. I'm a big fan of Roth conversions, moving that money to tax-free. But there's cases where maybe a Roth conversion isn't the right thing to do. I thought I'd give out five reasons on why people could come up with reasons on why you shouldn't do a Roth conversion. This way, when you're thinking about it, you can weigh it against doing a Roth conversion.

First one up is the upfront tax burden is too much. Remember, with a Roth conversion, you're taking the money out of a tax-deferred account and IRA and moving it into a Roth IRA. Now, once that goes out, it's got to get paid at ordinary income tax. Let's say you're in the 22% marginal bracket, and you're moving $100,000 from your IRA to your Roth IRA. That's a $22,000 tax bill just on federal that you have to pay right away. That might give hesitation, pause to people. That's a big one, the ability to lay out that money for the taxes, because when you do a Roth conversion, you want to pay it from cash on hand, or a worse case, a taxable account. You never want to take it from a tax-deferred account to pay taxes. It makes no sense.

Number two, you need clarity about the tax policy. That's an interesting point there that I came across. We know in '26, supposedly, the tax rates are going to change. What they call the Trump tax cuts sunset in 2025. Then '26, we have a new regime of taxes. Maybe people are saying, "Well, let's see what happens here before I decide to rush into these Roth conversions. Maybe they won't. Maybe that won't happen. Maybe they won't raise taxes." That's somebody trying to take a tax bet there, so to speak. That's another one.

Number three, very low income in the next generation. That's an interesting point. That goes to legacy planning. You're building up this huge tax-free Roth account. Maybe you're not going to spend it, and you'd like to pass it on to your next generation. That's great if you do a tax-free. But let's say, if you're in a high tax bracket and your next generation might be in a low tax bracket, you spread that out amongst a few of them, it might not make sense to be paying taxes at a higher rate when they can pay the taxes at a much lower rate. You can just transfer the money over that way instead of getting it to them tax-free. That's something to think about when it comes to legacy planning.

Number four, conversions are permanent. That means once you do a Roth conversion, there's no look back. Once it's done, it's done. You've paid the tax. You can't go back and say, "Eh, I don't want to do that." That's it. You wrote the check to the IRS. They're not giving you the money back. Once you do that conversion, that's it. You're set on that.

Number five is distrust that Roth accounts will be permanent. That might be a big concern for some, is, "Hey, I've got this Roth free tax account. I've paid the tax up front. That was the deal that I had with the government. I said I'll pay my taxes. Now I have a tax-free account." Maybe they'll come back later in time and say, "Oh, by the way, you know what? We might have a surcharge or something on the Roth tax-free account." I don't think that's going to happen, but hey, you never know. Maybe desperate for money. We're spending a lot of money as a government. There's no doubt about that. That's a legitimate concern.

Here's five reasons not to do a Roth conversion. I just wanted to be ... the term fair and balanced. I mention Roth conversions a lot. I'm a big fan of doing them if you're in a much lower tax rate in railroad retirement. I hope you found this video helpful. Click on the subscribe button to keep the numbers growing. Share the video with other retirees, especially who are thinking about Roth conversions. All right. Reach out to me if you need any help. Go through my boarding for railroad retirement process. We talk a lot about Roth conversions in that process, for sure. Until next time, everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved from Highball Advisors, and all rights are reserved.