Year-end Roth IRA conversions are popular — but don’t wait too long, financial experts say

If you’re weighing a year-end Roth individual retirement account conversion, waiting too long could be risky, financial experts say.

Roth conversions move pretax or nondeductible IRA funds to a Roth IRA, which can start tax-free growth. The trade-off is upfront taxes on the converted balance, which boosts your adjusted gross income.

The strategy has become more popular, with a 46% year-over-year increase during the second quarter of 2024, according to Fidelity.

Roth conversion timing is important, particularly for those eager to complete the transaction in 2024, experts say.

Some investors want to pay Roth conversion taxes now while there are lower tax brackets because the current rates are scheduled to sunset after 2025 without action from Congress.

However, it’s difficult to predict future tax law changes with uncertain control of the White House, the Senate and the House of Representatives.

Year-end is a popular time for Roth conversions because it’s easier to project the tax consequences, according to certified financial planner Ashton Lawrence, a director at Mariner Wealth Advisors in Greenville, South Carolina.

“You have a clearer picture of your income sources” for the year, such as bonuses, mutual fund distributions or partnership earnings, he said.

Roth conversions boost your adjusted gross income, which can trigger other tax consequences, such as higher Medicare Part B and Part D premiums for retirees, Lawrence warned.

While tax projections are important, you shouldn’t wait too long if you’re eyeing a year-end Roth conversion, experts say.

Your financial institution could be overwhelmed if you wait until December, said CFP and enrolled agent Tricia Rosen, founder of Access Financial Planning in Newburyport, Massachusetts.

Often, these companies are juggling other year-end transactions, such as qualified charitable distributions, tax-loss harvesting and more.

“I’m more conservative,” she said. “But I want to get it done by mid-November.”

Lawrence said that while he typically completes Roth conversions in December, he also begins the process earlier. Often, the timeline can be shorter than investors expect, especially during the holidays, he said.

“Right now is a good time to start having that conversation,” Lawrence said.