Kick or Convert

Now in the midst of football season, I have officially dawned my Coach on the Couch hat as I happily explain to my friends (or any willing listener) everything that the Steelers are doing wrong and why it’s so obvious. And there is plenty to scrutinize with the Steelers having one of the best quarterback controversies in the league, a coordinator on the hot seat, all the receiver drama you could want, and Mike Tomlin still losing coaching challenges at a record pace.

One of the most popular decisions to criticize the coach for anymore is whether or not to go for a two-point conversion or kick the extra point after a touchdown. Modern analytics have made this a hot topic as they look at the stats and what move will pay off the best. But you never really know if you picked right until the end of the game.

Another conversion that many investors may have on their mind at the moment is the Roth Conversion.

The Roth Conversion is kind of a high risk, high reward play in retirement planning similar to a two-point conversion in football. And depending on your timing and execution, one can make you feel like a genius or like you lost the game.

A Roth Conversion is basically when you move money from your IRA into a Roth IRA. This move is taxable in the year you complete it. After that, the conversion amount has to be in the Roth for 5 years before both the principal and interest are tax free.

This is an intriguing move, but many times when people look at paying more taxes now and how that would affect other expenses it can lose its allure quickly.

There are times when a move like this can really work out though and one of them is when markets are down.

If you look at an IRA account as shares owned and not as dollar amounts, you would want to pay as little tax as possible when you redeem those shares, but you want to use them at their highest value. This is hard to do if you need to use the money immediately. But if you don’t need the proceeds for a while, a Roth Conversion can help you do exactly that. You can convert those shares while their values are down, minimizing taxes, and then withdraw the money any time after those 5 years when values have recovered.

This can be a powerful tool to minimize taxes in years down the road as long as the repercussions of that taxable income now aren’t too harmful.

They can also make for a great estate planning tool since Roth IRA dollars aren’t taxable to beneficiaries after those 5 years either.