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One day a forward-thinking couple arrived in my office with a plan. They wanted to bequeath the bulk of the money in an IRA to their two children, and they also wanted the children to receive that money free of tax.

Nice idea, so together we set about crafting a strategy that would help make it happen.

Here’s how: Bit by bit, we are converting money from their traditional IRA into a Roth IRA. Each year we will make conversions, but we are doing so while being careful in any given year not to bump the couple above their 24% marginal tax bracket, which for 2021 is up to $329,850 in taxable income for a married couple filing jointly.

Yes, they must pay the taxes on any amount moved from the traditional IRA to the Roth, but once the funds arrive safely in the Roth, their savings can grow tax free.

Under the SECURE Act, their children can defer any distributions from the inherited Roth IRA until year 10, allowing the money to continue to grow tax free that entire time. And the children won’t be taxed on the distributions when they do take them.

This couple established for themselves a mission that included their children’s future, and they are well on their way to being able to say: “Mission accomplished.”

Now is a good time to do so

Financial professionals talk a lot these days about Roth conversions such as the one my clients are using, and with good reason. These conversions are a great tool for reducing future tax liability, and now is an opportune time to take advantage of them. The tax reductions for individuals that came about with the Tax Cuts and Jobs Act of 2017 are set to expire at the end of 2025.

That means, short of some last-minute congressional action, taxes will go back up in 2026. You will still be able to do a Roth conversion, but the taxes you pay when you move the money from a traditional IRA are likely to be higher.

So, if you are a good candidate for a conversion, the time is ripe to act before the tax rate jumps back up.

People who can benefit

But you might ask, what kind of person benefits from a Roth conversion? Among those who should consider converting to a Roth are:

• Anyone who feels that, when they retire, they will have income that puts them in a higher tax bracket than their current one. How could that happen? One way is that, when you reach age 72, the IRS requires you to start taking a percentage of your money out of retirement accounts, such as a traditional IRA, in which taxes were deferred. Those withdrawals — when added to your Social Security, pension and any other income you might have — could bump you into a higher tax bracket.
• Anyone between the ages of 60 to 72 who is retired and on a limited income of Social Security. Why the cutoff at age 72? That’s the age you must start taking those required minimum distributions, and IRS rules don’t allow you to convert RMDs to a Roth, so ideally you want to get the job done before you reach that magic age.
• Investors like the couple I am working with, who want to leave a tax-free legacy behind for their heirs.

Not optimal for others

Despite all the good you can say about Roth conversions — and there is definitely plenty of good to say — they aren’t for everyone.

Let me tell you a story about another client who had a very different situation and for whom a Roth conversion did not factor into the solution.

This client had heard about Roth conversions and about a year ago asked me about doing one. When I reviewed his tax returns, I discovered something interesting. He is retired on disability pay that is not taxable. In fact, he could take money out of his traditional IRA each year and still not owe taxes.

Since his major source of income is tax free, he was not a good candidate for a Roth conversion. Anyone whose income is similarly tax free probably can skip the idea of moving money into a Roth.

Others who should not consider a conversion are people with high incomes who are in their peak earning years. Remember, when you convert money to a Roth IRA, you increase your taxable income for that year.

One other important factor to consider is that converting funds from a traditional IRA to a Roth IRA could increase your future Medicare part B premiums.

Medicare Part B premium costs are determined by your modified adjusted gross income from two years prior. For 2021, monthly Medicare Part B premium costs range from a low of $148.50 to a high of $504.90. Any Roth conversions done for the tax year 2021 could affect your 2023 premiums.

To become better informed about what a Roth might mean for you, consult a CPA or a Certified Financial Planner. They should be able to help you make the right move — and avoid the wrong one.

Ronnie Blair contributed to this article. © 2021 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.