Hello, YieldAlley readers! In this issue:

🚗 It’s Tesla vs. Google in the fight for self-driving supremacy. (Sherwood)

₿ Here's what experts say is behind bitcoin's $800 billion drop (CBS)

🧠 10 Things We Can Learn From Warren Buffett That Have Nothing to Do With Money (Morningstar)

📈 Are Stocks a Better Bet Than Social Security? (WSJ)

🐻 Do We Need a Long Bear Market? (A Wealth of Common Sense)

As retirement approaches, many investors face a critical decision: should they convert their traditional 401(k) or IRA to a Roth IRA? Recent research suggests the answer is often yes, but timing and method matter significantly.

A Roth conversion involves transferring funds from a traditional tax-deferred retirement account to a Roth IRA, paying income tax on the transferred amount. While this creates an immediate tax bill, the long-term benefits can be substantial. Your money grows tax-free in a Roth account, you avoid required minimum distributions (RMDs), and your heirs inherit a more tax-efficient asset.

Research analyzing hundreds of thousands of simulations across different tax and market scenarios found that a one-time Roth conversion typically outperforms keeping money in a traditional account. Over a 10-year period, investors averaged $110,000 more in their final balance with a one-time conversion compared to taking RMDs from a traditional account ($1.44 million versus $1.33 million).

Surprisingly, converting your entire balance at once generally produces better results than spreading the conversion over multiple years. The one-time method outperformed equal installments by roughly $50,000 over 10 years in the research.

The advantage grows over time. For every year you live beyond age 83, the benefit of a Roth conversion increases by approximately $15,000. This makes Roth conversions particularly attractive if you don't need the money immediately or expect a longer retirement.

Before rushing into a conversion, understand these key factors:

Tax bracket management: Converting adds to your taxable income for that year. A large conversion could push you into a higher tax bracket. For married couples filing jointly in 2024, the 24% tax bracket topped out at $383,900. A poorly timed conversion could also increase your Medicare premiums.

Widowhood planning: Tax brackets are significantly less generous for single filers. The 24% bracket ended at just $191,950 for singles in 2024 versus $383,900 for married couples. If you're married, consider that a surviving spouse might face higher tax rates on future conversions or distributions.

Multiyear approach: While one-time conversions perform best in research, practical considerations often favor a phased approach. Financial planners typically recommend working with a tax professional each December to calculate how much can be converted without jumping tax brackets, then completing the transaction before year-end.

If you don't convert and your children inherit traditional IRAs, they'll face the 10-year rule requiring full withdrawal within a decade of your death. They'll pay taxes at their own rate, which could be higher than yours. A Roth conversion essentially pre-pays these taxes at your current rate, potentially saving your heirs significant money.

Roth conversions work best when you can pay the taxes from funds outside the retirement account, allowing the full balance to grow tax-free. They're also ideal if you expect to be in a similar or higher tax bracket in retirement, don't need the money soon, or want to leave tax-free assets to heirs.

If you're already in a high tax bracket and expect to drop significantly in retirement, paying taxes now might not make sense. Similarly, if you need the money within a few years, the tax-free growth period may be too short to overcome the immediate tax cost.

Review your current tax bracket and estimate your retirement tax situation. Calculate how much you could convert while staying in your current bracket. Consider whether you have cash outside retirement accounts to pay the conversion taxes. Most importantly, work with a tax professional who can model your specific situation and help time conversions strategically.

A Roth conversion isn't right for everyone, but for many pre-retirees, it represents one of the last opportunities to efficiently reduce future tax burdens and create a more flexible retirement income strategy.

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