Should I Convert To A Roth IRA?

Converting from a traditional IRA to a Roth IRA has many benefits but should not be done without consulting your tax adviser. In most cases, this will be an easy transition but you need to know the current and future tax implications. Don’t be afraid to ask for advice from a financial professional. Their expertise will smooth the way for your conversion.

One consideration is when you plan on retiring versus your current age. With a Roth IRA, taxes are paid before contribution so the money will grow tax-free. This has tremendous benefits in the future when it becomes time to withdraw. However, you won’t have the benefit of using your tax money to grow interest as you do with a traditional IRA. You may also be in a lower tax bracket during retirement but remember tax rates could also increase in the future. There are several online calculators that use a combination of factors (i.e. how many years you have until retirement, future and current tax brackets, whether you can pay the conversion penalty without using current IRA funds) to evaluate whether conversion is your best option. Generally speaking, the older you are, the less sense it makes to convert since you may not have time to make up the money lost during conversion.

Another important factor to this decision is your current tax implications. You are responsible for the taxes on the current money in your IRA. You will pay taxes now on the amount you convert. You can use current IRA funds, but that is not advisable for several reasons. First, if you are younger than retirement age, you will have to pay a 10% penalty. Second, this leaves less money for your savings. Also remember the amount moved in Roth IRA conversions will count towards your current income taxes and could affect your tax bracket. This may or may not affect any other tax benefits you are receiving this year.

Finally, if you are planning on leaving your retirement money to your estate, a Roth IRA may be a better choice than a traditional IRA. One benefit is that you are not required by law to make minimum withdrawals when you reach retirement age, as you are with a traditional IRA, leaving more money to grow tax-free for your heirs. Another benefit is that during conversion you will pay income tax and reduce your taxable estate. This could reduce the estate tax for your inheritors.