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One of the biggest questions in retirement tax planning is whether it makes sense to pay taxes now instead of later.

For many people, the answer may be yes.

In this episode of The Divorce the IRS Podcast, we break down Roth conversions and why they can be a powerful strategy for moving money from tax-deferred accounts into tax-free Roth accounts.

A Roth conversion allows you to shift some or all of your pre-tax retirement money into a Roth account. While this creates a tax bill in the year of the conversion, it may also help reduce future taxes and create more tax-free retirement income.

We explain why Roth conversions are sometimes described as “refinancing your IRA” and how this strategy can help investors lock in today’s tax rates instead of waiting to see what tax rates may look like later in retirement.

You’ll learn why paying taxes on retirement money today may be more attractive than paying taxes later on a much larger account balance, especially if your pre-tax accounts continue to grow over time.

We also discuss important rules and planning considerations, including the five-year rule for Roth conversions, the 10% early withdrawal penalty, why you should generally avoid using converted retirement funds to pay the tax bill, and why Roth conversions can no longer be undone through recharacterization.

If your goal is to build more tax-free retirement income, reduce future required minimum distributions, and create greater long-term tax flexibility, Roth conversions may be an important strategy to understand.

In This Episode

• What a Roth conversion is
• How Roth conversions move money from tax-deferred to tax-free accounts
• Why Roth conversions are sometimes called “refinancing your IRA”
• Why current tax rates matter in retirement planning
• How future account growth can increase future tax exposure
• Why you may not be in a lower tax bracket in retirement
• How to strategically convert only the amount that makes sense
• Why you should be careful about pushing into a higher marginal tax bracket
• Why paying the tax bill from outside funds may be important
• How the 10% early withdrawal penalty can affect younger investors
• How the Roth conversion five-year rule works
• Why Roth conversions are permanent and cannot be undone
• How Roth conversions may affect Social Security taxation, Medicare premiums, RMDs, surviving spouses, and heirs

What’s Coming Next

• Lesser-known strategies for early retirement planning
• Ways to create tax money for Roth conversions
• More tax-free retirement income strategies
• Advanced planning concepts for reducing future retirement taxes

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