By: Adam Stoeckler, CFP® Investment Advisor Representative September 25, 2025 Roth conversions are grabbing headlines in the world of retirement planning, and for good reason. The concept is simple: move money from a traditional retirement account, like an IRA or 401(k), into a Roth IRA, pay taxes now, and enjoy tax-free growth and withdrawals later. Sounds great, right? While Roth conversions can be a powerful strategy, there are potential “landmines” that you should keep in mind and plan for if you are considering converting traditional IRA funds to Roth. Here are five key risks to be aware of. As always, you should consult with your financial advisor in coordination with a tax professional before making a move. 1. A Big Tax Bill Now When you convert money to a Roth IRA, the converted amount is added to your taxable income for the year. For example, if you convert $100,000 in a single year, that money could push you into a higher tax bracket and result in a substantial tax bill. • Why it matters: Paying this tax upfront can reduce the amount of money actually growing in your Roth. Using retirement funds to cover the tax further diminishes the benefit of the conversion. • Consideration: Spread conversions over multiple years to manage the tax impact and avoid jumping into a higher bracket all at once. Consider using non-qualified dollars outside the IRA to pay the tax bill. 2. Higher Medicare Premiums Medicare Part B and Part D premiums are tied to your income. A large Roth conversion can temporarily raise your Modified Adjusted Gross Income (MAGI), triggering higher premiums that would take effect in the second year after the conversion. • Example: A couple with moderate income who does a $100,000 conversion could see Part B premiums increase by hundreds of dollars per month, totaling thousands over time. • Why it matters: Unexpectedly higher Medicare premiums can offset some of the tax-free growth benefit of the Roth. Planning conversions carefully around anticipated income levels is essential. 3. Reduced Health Insurance Subsidies If you purchase private insurance through the Affordable Care Act and qualify for premium subsidies, a Roth conversion counts as income. • Impact: The extra income can reduce or eliminate subsidies, leading to higher monthly premiums or even a repayment at tax time. • Example: Someone expecting a $3,000 premium credit could see it reduced to $1,000, effectively adding $2,000 in health costs due to the conversion. • Planning tip: Coordinate Roth conversions with health insurance planning to avoid unexpected costs. 4. Estate Planning Considerations Roth IRAs are often touted for their tax-free growth and ability to leave money to heirs. However, in some cases, keeping money in pre-tax accounts may be more efficient. • Why it matters: If your heirs are expected to be in lower tax brackets than you, leaving pre-tax accounts for them may minimize overall taxes. • Additional factor: Some estate strategies involve intentionally deferring conversions to optimize the tax impact across generations. Consulting an advisor can help determine the best approach for your situation. 5. Liquidity and Cash Flow Concerns Paying taxes on a Roth conversion is ideally done from outside retirement funds (see #1, above), so that the full converted amount grows tax-free. • Potential problem: If you don’t have the cash available, using retirement funds to pay taxes reduces the long-term growth potential. • Why it matters: For retirees on a fixed income, a large conversion could strain cash flow or force difficult trade-offs with other expenses. Planning conversions in manageable amounts over several years can mitigate this risk. Bottom Line Roth conversions can be a smart way to secure tax-free growth, but they come with trade-offs. Understanding the implications for taxes, Medicare premiums, health insurance subsidies, estate planning, and cash flow is essential before making a move. If you’d like a detailed Roth conversion plan tailored to your specific situation, contact us today. Our team of financial advisors can help you weigh the benefits, minimize the risks, and create a strategy that works for your retirement goals. Disclosures: Advisory services are offered through Highland Investment Advisors, LLC a SEC Investment Advisor. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than where legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. 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