I’ve converted 46% of my nest egg to Roth – am I overshooting my target with more conversions?

If you’re unable to contribute to a Roth account directly, there’s good news — you can convert a traditional retirement plan to a Roth by paying taxes on the sum you roll over.

It may be that you have an employer 401(k) plan without a Roth savings option (since not every plan does), or that you earn too much for a Roth IRA.

If you time your conversions right, you can enjoy the many benefits of having a Roth account in retirement. These include tax-free gains, tax-free withdrawals, and the ability to avoid having to take required minimum distributions.

But you don’t necessarily want 100% of your retirement savings in a Roth account, either. And this Reddit poster is wondering if they’ve gone overboard on conversions.

The poster has been moving money into a Roth account and now has 46% of their total savings in it. The poster also has 51% of their savings in a traditional retirement plan and 3% in an HSA.

They’re wondering if they should keep doing Roth conversions or stay put where they are. And it’s a good thing they’re asking this question before doing more conversions.

Having some taxable retirement income could work to your advantage

Roth accounts offer many benefits, and it’s nice to not have to think about paying taxes on the money you withdraw. But believe it or not, you don’t necessarily want 100% of your retirement income in a Roth. There can be benefits to having some taxable income.

For example, you never know if the IRS might introduce a tax credit that you can only claim if you have taxable income to reduce. So rather than move all of your money into a Roth account and pay taxes on the conversion, you may want to keep some of your savings in a traditional retirement plan.

That said, having 20% or 25% of your long-term savings in a traditional IRA or 401(k) may be more than sufficient. So in this case, what the poster should think about is their near-term tax bracket.

If it’s fairly low, they could consider moving a bit more money into a Roth account. But if they’re getting bumped into a higher tax bracket, they could stop where they are with 46% of their total savings in a Roth account.

A financial advisor can help

Questions like the one above are really best suited for a financial advisor, and here’s why. There are numerous factors that should go into the decision.

Anyone who’s contemplating a Roth conversion should consider their current versus future tax bracket — that’s pretty much a given. But the decision-making process goes beyond that, which is why talking things through with a financial advisor is ideal.

An advisor can look at the big picture and help you come up with the right Roth versus non-Roth allocation based on your specific needs and goals. They can also help you time your Roth conversions to minimize the taxes you get stuck paying in the near term.

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