Roth conversions are not for everyone. But for many dentists - especially practice owners - they can be a smart, proactive tax move if you’re strategic about the timing and amount of the conversion.
But first -
Hello! I'm Sharon (see pic above).
I'm an advice-only financial adviser for dentists based in Kansas City, working with clients nationwide to create clear, confident financial plans. If you would like to talk about your goals at any stage of your career, let's set up a time to connect.
Now, to the question at hand:
“As a dental practice owner, what do I need to know about doing a Roth IRA conversion?”
Roth conversions may feel expensive or confusing, but if your goal is a tax-efficient retirement, it’s a conversation worth having.
First, Some Background on Roth vs. Pre-Tax Funding of Your Retirement
Most dentists save into pre-tax retirement accounts - usually 401(k)s - during their high-income working years. That usually makes sense from a tax-deduction, cash flow, and tax-deferral perspective. But here’s the kicker: when you hit a certain age, the IRS eventually wants its cut.
How Does Your Contribution Choice Impact Your Future Taxes?
- Pre-Tax contributions reduce your taxable income now, but after a certain age, 73 or 75 depending on your birth year, distributions are required and will be taxed as ordinary income.
- Roth contributions are made with after-tax dollars, offering no immediate tax deduction, but withdrawals are tax-free. Withdrawals are never required at any age, and growth is tax-free for life. Be aware that there are some taxes and withdrawal rules that apply to Roth withdrawals before age 59.5.
What if You Have Been Making Pre-Tax IRA or 401(k) Contributions And Wish They Were Roth?
If you think your tax rate will be higher in retirement - or if you're in a low tax bracket currently - it might make sense to start making Roth 401k contributions and/or do a Roth Conversion by moving your pre-tax money in the 401(k) to the 401(k)'s Roth category. If your current plan design doesn’t allow this, a quick amendment could fix that. You’ll pay taxes now in exchange for tax-free withdrawals later. You can apply a similar strategy to any traditional IRAs you have, converting them to Roth IRAs in low tax bracket years.
What Are The Unique Opportunities Dentists Have For Roth Conversions?
After the sale of your dental practice, and before the required distributions from your pre-tax contributions (starting at age 73 or 75), you may find yourself in a period of low tax bracket years, particularly if you are living off the after-tax proceeds from selling your dental practice.
Another low-bracket opportunity can occur when depreciation or deductions are created during a practice purchase, build-out, or equipment upgrade.
These can be very strategic times for dentists to do some tax planning, and careful Roth conversions using up the lower tax brackets can be very fruitful long term.
When evaluating Roth conversions, most dentists focus on the immediate tax bill and future tax-free growth. But there are broader implications:
The Pros and Cons
- Pro = Lower Future Tax Bills: By moving money into the Roth category, your future Required Minimum Distributions (RMDs) will be lower, potentially reducing future taxes for many years. We can run scenarios to see if paying the current tax hit is worth the future tax savings.
- Pro = Benefits for Heirs: Income taxes are due on your traditional IRAs, even upon inheritance. Roth IRAs are inherited income-tax free.
- Con = Medicare Premiums (IRMAA): Roth conversions could trigger higher Medicare Part B and D premiums for those over age 65—called IRMAA surcharges.
- Con = six of one, half a dozen of the other: If we find that your current tax bracket is similar to or higher than your future tax bracket, a Roth conversion may not make enough of a difference.
That’s why planning matters. For retired or soon-to-retire dentists, it’s important to run the numbers so we manage Roth conversions strategically for your individual situation.
An example of when it worked well: one of my clients sold his practice and entered a lower-tax phase before starting his Required Minimum Distributions (RMDs). We took advantage of this window to convert a portion of his IRA to a Roth each year, carefully staying below key tax thresholds. Over three years, he shifted more than $300,000 at favorable tax rates, reducing his future RMDs and taxes, and helping keep his Medicare premiums lower in retirement.
Questions to Ask Before a Roth Conversion
- What’s my long-term tax benefit of reducing RMDs and having more tax-free assets?
- Should I take the tax hit now at my current income tax rate, or do I expect a lower rate in retirement? Be sure you’re looking at your RMD years when considering your “retirement” tax bracket.
- If I’m within two years of Medicare, could this conversion trigger IRMAA?
For many dentists, there may be unique opportunities to convert 401(k)s and IRAs in low tax bracket years created by investments in the practice or after a practice sale. We can help you run the numbers to see if it’s a good move for you.
Because we operate on a fee-for-service model (flat fee for advice - no commissions, no asset-based fees), our focus is entirely on your financial picture—not moving money, selling products, or managing accounts for profit. We believe it’s a more objective way to work.
Thanks for reading our blog about Roth conversions for practice owners. If you'd like to talk about what financial planning looks like as a new dentist, a growing practice owner, or a dentist transitioning to retirement, contact us to set up a time to talk.
Disclaimer
IRS CIRCULAR 230 DISCLOSURE
In compliance with requirements imposed by the IRS pursuant to IRS Circular 230, we inform you that any U.S. tax advice above is for informational purposes not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.