Roth Conversion Pitfalls
Converting because of a long time horizon.
Converting due to the anticipation of a high investment return.
Converting when you’re likely to have a lower tax bracket in the future.
Waiting too long to start (like when faced with RMD’s).
Not considering or fully understanding the IRA Aggregation Rule.
The advisor/planner writes “backdoor Roth conversion” in their notes.
Moving too quickly from the first to the second step of a ‘backdoor’ conversion, potentially triggering the Step Transaction Doctrine.
Not checking availability of Mega Backdoor conversions first.
Converting all at once without considering a barbell or conversion cost averaging strategy.
Waiting to start the 5 year clock.
Missing a conversion opportunity in a low income year.
When converting from or in a 401(k), 403(b), TSP or other employer sponsored plan, missing an opportunity to split after tax contributions from pre-tax contributions and pre-tax earnings.
Forgetting that recharactsrizations are no longer available.
Missing the impact of the increased income on items like social security taxation, medicare premiums, financial aid for dependents, RMDs, estate.
Converting in a high income year.
Not considering paying taxes “out of pocket”.
Not considering the potential loss of or reduction in creditor protection.
Effective financial planning integrates tax strategies to maximize the value of every dollar through tax efficiency. Achieve this by leveraging software for precise analysis, combined with expertise in tax options and strategies. Then write it down, stick with it and adjust as things change.
Read on for explanations of each pitfall —>
