On Money & More – June 2025

WITH SUMMER’S ARRIVAL, things are ramping up here in Jacksonville! The Britt Festival is in full swing, and California Street will be lined with tourists. But even as life gets a little busy, that doesn’t mean we shouldn’t plan ahead—especially when it comes to retirement. One tool we work with at Cutler that is often misunderstood, yet increasingly powerful, is the Roth conversion.

A Roth conversion allows you to take money from a traditional IRA or 401(k)—where you likely received a tax deduction when contributing—and move it into a Roth IRA, where qualified withdrawals will be tax-free. When you convert, and here’s the rub, you pay income tax on the entire amount transferred that year. But after that, the money grows tax-free and also comes out tax-free in retirement.

So why go through the trouble (and the tax bill) of converting?

For one, it’s a hedge against future tax rate increases. If you expect to be in a higher tax bracket later—either because of policy changes or increasing income in retirement—a Roth IRA can be a smart move. While the extension of the Tax Cuts and Jobs Act will be a hotly debated topic this summer, the likelihood of taxes being lower than today seems minimal. What about higher income in retirement? How is this possible? It is important to consider the future impact of required minimum distributions (RMDs). Since Roth IRAs are not subject to RMDs during the account holder’s lifetime, conversions may smooth your tax rate and avoid increasingly higher tax years as RMDs ramp up.

But Roth conversions aren’t for everyone. There are no income limits to perform a conversion, but the key limitation is tax: the amount you convert is added to your taxable income for the year, which can bump you into a higher tax bracket, affect Medicare premiums, or reduce eligibility for certain tax credits.

The best strategy is usually to convert just enough each year to “fill up” a lower tax bracket. For example, if you’re in the 22% federal tax bracket and have room before you hit the 24% bracket, you might convert up to that line. This is especially effective in retirement gap years—those years after retirement but before Social Security or RMDs kick in, when your income is lower. It’s also worth considering Roth conversions in years where your income is unusually low—say, if you took a sabbatical, changed careers, or experienced a business slowdown. And if markets are down, converting during a dip can let you pay taxes on a temporarily lower value, then enjoy tax-free gains when values rebound.

This is just one example of a great financial planning tool that is available for those approaching or in retirement. If you’d like to talk to us about whether this might be worthwhile for you, please visit our offices at Bigham Knoll this summer! Or feel free to come on by just to say ‘hi.’ We’ll be happy to see you!

All opinions and data included in this commentary are as of May 11, 2025 and are subject to change without notice. The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or individual investment advice including the asset allocation provided. Nothing herein should be construed as tax advice. This article is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase or sell securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Investing involves risk, including the potential loss of principle. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.