Soon-to-be retirees face decisions that will play a significant role in determining their level of income for years to come. The most obvious of these decisions is when to retire. Along with that, the decision of when to start collecting Social Security benefits has significant ramifications.

Along with these “timing” decisions, two other choices help determine how one’s nest egg will be spent. First, retirees with a blend of account types (company retirement, Roth IRA, taxable account, etc.), will need to determine when and how much to draw from each account. Second, an opportunity many retirees overlook can play a surprisingly large role in the long-term income picture — namely, the decision as to whether to convert any traditional IRA money to a Roth IRA.

Roth conversion basics

Roth conversions, like most tax-related matters, are detailed processes with many specific rules. SMI has written a detailed primer on these rules, and we’ve discussed the “basic” considerations involved in whether to convert traditional IRA assets to a Roth. We suggest reviewing those earlier articles when you’ve finished reading this one.

In this article, we want to focus more broadly on why Roth conversions can be a potent retirement-income planning tool. Simply put, Roth conversions offer the potential to significantly reduce the total tax you’ll pay during retirement, as well as provide much more flexibility regarding the timing of your future withdrawals and tax liability. Both are important planning considerations.

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