June 2026 | The Short Guide to Roth Conversions
Good afternoon from your team at Perennial Wealth Advisors! I hope this finds you and your families well and enjoying these early days of summer. I’m excited to share another edition of our monthly newsletter covering Roth conversions, a market update, and some friendly reminders.
ROTH CONVERSIONS
For a good number of our client’s, the lion’s share of their retirement assets are in tax-deferred accounts (IRAs, SEP IRAs, 401(k)s, etc.). Every dollar in these accounts is subject to ordinary income tax once a qualified distribution is made. Therefore, Roth conversions are a strategy we often employ as an attempt to decrease the tax burden over time. However, this strategy does come with complexity. Every client’s situation is different, and there are multiple factors at play in determining if a Roth conversion is the best option.
What is a Roth Conversion? A Roth conversion involves moving money from a pre-tax (tax-deferred) account into a Roth IRA. By doing so, you will pay ordinary income tax on the amount converted, for the year converted. In exchange, those dollars grow tax-free and qualified distributions are tax-free after a 5-year holding period.
When does a Roth Conversion Make Sense? The simple question behind every Roth conversion is: will my taxes paid be lower now, or in retirement? If you expect to be in a lower tax bracket today, a conversion might be a good option. If you expect your taxes to be lower in retirement, it likely makes more sense to leave the money in the tax-deferred account. Below are a few special scenarios where you might consider a Roth conversion:
You are in a lower-income year. Certain situations like career transitions or years with significant tax deductions can temporarily reduce your taxable income, allowing for opportunities to complete Roth conversions at a more favorable rate.
You are in the “trough years.” The window between retirement and Required Minimum Distributions (RMDs) at age 73 is often an advantageous gap to complete Roth conversions while remaining in a lower tax bracket. Doing so also decreases future RMDs to avoid larger tax bills down the road.
You want to be strategic about your tax bracket. Acommon approach is to convert only up to the ceiling of your current tax bracket thereby converting without crossing into a higher rate. Rather than converting everything at once, spreading conversions across multiple years can make the tax impact more manageable and may reduce the overall amount you pay over time.
You have time on your side. The longer converted dollars have to compound tax-free inside a Roth, the greater the benefit.
You aim to reduce future RMDs. Traditional IRA balances are subject to mandatory withdrawals beginning at age 73. For clients with large pre-tax accounts, those distributions can create a significant tax burden in retirement. Gradual conversions over time can meaningfully reduce this mandatory tax exposure, as well as offer increased flexibility of withdrawal types.
You have estate planning goals. Though spouses have more flexible options, non-spouse beneficiaries of a Traditional IRA are required to have distributed the whole account within 10 years of the original owner’s death. This can pose a significant tax burden to the benefactor. Though dollars in a Roth IRA are also subject to the 10-year rule, they are distributed tax-free, decreasing the tax burden on the inheritor.
A Few Caveats
There is a five-year rule to be aware of. Earnings within a converted Roth IRA must remain in the account for at least five years before they can be withdrawn tax-free. Each conversion carries its own five-year clock, so this is especially relevant for clients who may need access to funds sooner rather than later.
Keep in mind that large conversions can push you into a significantly higher tax bracket as well as potentially trigger Medicare premium surcharges (IRMAA).
Lastly, Roth conversions prove to be the most efficient when taxes on the conversion are paid from outside the retirement account being converted. Of course, this depends on the availability of cash outside the investment accounts.
In Summary
With the recent passage of the One Big Beautiful Bill Act, the tax brackets established by the 2017 Tax Cuts and Jobs Act have been made permanent. The sunset that had created urgency around conversions in prior years is no longer the driving factor, but the core reasons to consider a conversion remain. If you are in a lower bracket today than you expect to be in retirement, or if you are navigating the gap between retirement and RMDs, the conversation is worth having.
If any of the above sounds like your situation, we would love to talk through it together. Roth conversion decisions are best made in the context of your full financial picture including your retirement income, your current bracket, your account balances, and your goals. Lastly, I’ve attached a guide titled Should I Consider Doing a Roth Conversion? Please let us know if you have any questions.
MARKET UPDATE
Kevin Warsh delivered his first press conference as Fed Chair, followed by mixed reactions from commentators. We will likely hear less from Warsh than we did from Powell given Warsh’s criticism of the Fed for overcommunicating. Nine of 18 members of the rate-setting committee signaled they supported higher rates this year.
However, since the conference we have seen a sharp decline in oil prices which could significantly improve the inflation picture. If oil remains near current levels, CPI readings could be exceptionally low over the coming months. Under those circumstances, it’s difficult to envision the Fed raising rates this year. However, this doesn’t necessarily signify rate cuts given that core PCE inflation remains above the Fed’s target.
The labor market continues to show resilience as jobless claims moved lower. Steady employment combined with declining energy prices improves real purchasing power, which in turn supports spending and improves business confidence. Further, there continues to be massive spending on AI infrastructure and analysts continue to wonder if the revenue will back up all the spending in the end. Artificial intelligence does seem to be improving overall productivity. Below, I’ve included a quote from Jeremy Siegel that I found interesting given the AI landscape.
“Massive investments in data centers, semiconductors, energy infrastructure and reshoring are creating significant demand for labor even as AI improves efficiency. Rather than producing a labor apocalypse, AI appears more likely to augment workers and raise output per employee. The lesson from history is that technology often changes jobs more than it eliminates them.” - Dr. Jeremy Siegel, Professor Emeritus of Finance at the Wharton School
Lastly, a friendly reminder: I share these market updates not necessarily to prompt action, but to keep you informed and grounded. We are goal-focused, plan-driven, long-term equity investors. Our portfolios are built around your most important lifetime financial goals, not around any forecast of the economy or the markets. We do not believe markets can be consistently timed. What we do believe is that by staying invested and participating in the long-term growth of equities you position yourself on the most reliable path toward your goals. Thanks for reading, and press on.
FRIENDLY REMINDERS
Trump Accounts – We’ve had a lot of clients asking about “Trump Accounts.” These are tax deferred accounts for children under the age of 18, and there is a $1,000 contribution available for U.S. children born between 2025 – 2028. More information is available at, https://trumpaccounts.gov/.
Please keep in mind that some sections of the newsletter, quite often the “Friendly Reminders,” have been redacted in order to communicate with the larger audience of the internet. Our client’s receive the full, original newsletter. If you’d like to learn more about becoming a client, please reach out to us in the “Contact” section of our website.
Sincerely,
Brock Hedgecoke, CFP®
Financial Advisor