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To Convert or Not To Convert – that is the question. The answer? It depends. It depends on your future financial needs.
What is a Roth conversion anyway?
A Roth conversion is the process of moving an 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-freeinheritance 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?
Contact us for a free retirement plan review to see if you will benefit from a Roth IRA conversion.
