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To Convert or Not to Convert in 5 EASY steps

What is a Roth conversion?

A Roth conversion is the process of moving IRA or employer plan assets to a Roth IRA.

When will you need the money? If you have an immediate need for the funds or need them to continue your current standard of living, then a Roth conversion is probably not for you. However, if you have no immediate need for the funds, a Roth conversion is potentially a great way for the funds to grow tax-free over your lifetime.

Where will the money come from to pay the tax? In nearly all cases, the money to pay the tax on a Roth conversion should come from outside (non-retirement account) funds in order for the conversion to make sense. When a Roth conversion is made, it triggers a taxable event, so your ability to pay that tax with outside money will go a long way in determining whether a Roth conversion is right for you.

What do you think future tax rates will be? If you believe your income tax rate will be the same or higher in retirement, then converting funds to a Roth IRA NOW makes more sense, since you will be paying the tax at a lower rate. On the other hand, if you think your income tax rate will be much lower in retirement, you may want to forgo a Roth conversion and take advantage of lower tax rates in a later year.

Other reasons to consider a Roth conversion. You may have favorable tax attributes in the year of the conversion such as large charitable deductions, carry forward losses and investment tax credits; you will not have to take required minimum distributions starting at age 70 ½; you will have the ability to make contributions even after age 70 ½ if there is eligible earned income; you can provide an income-tax-free inheritance to your heirs.

Other reasons to NOT consider a Roth conversion. You have an aversion to paying the income tax up front; you do NOT trust that the government will keep their tax-free deal; you want to make a charity the ultimate beneficiary and it will NOT have to pay income taxes on the money it receives, so why should you?

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