Is a Roth Conversion Right for You
It's a question we hear a lot - should I convert some or all of my Traditional IRA to a Roth IRA?
Like most things, the answer is - it depends.
A Roth conversion occurs when the funds from a Traditional or Rollover IRA (pre-tax contributions, or were tax-deductible) are converted to a Roth IRA (after tax contributions). Upon conversion, the amount converted is taxed at income rates, just as IRA distributions would be in retirement. Future growth within the Roth IRA is tax-free.
When does it make sense to convert:
If you have cash reserves available to pay the tax on the conversion.
If you have a time horizon sufficient to overcome the tax burden of the conversion (however, also consider the next generation's time horizon - up to 10 years past inheritance, with the new SECURE Act IRA distribution rules).
Consider your current tax rate vs. potential future tax rates (you would want to convert during a low tax/low income year). Also consider the assumed tax rate of your beneficiaries. If you are in a lower tax bracket than they are (or their tax rate is anticipated to increase in the future), you could choose to convert at your tax rate now in anticipation of their future tax efficiency if you have other retirement funds available to meet your needs.
When does it NOT make sense to convert?
When your retirement income needs are dependent upon the funds you would convert AND your time horizon may not allow enough time for asset growth to make up for the tax impact.
If you don't have separate cash on hand to pay taxes on the conversion.
This year may present a few scenarios to consider:
Is your income lower this year than normal, AND you have a cash reserve to pay the taxes on the conversion?
Are you planning to leave your heirs IRA funds as part of their inheritance, AND they are (or will be) in a higher tax bracket than you are?
Were you anticipating a Required Minimum Distribution this year, and had already 'budgeted' the tax burden of the distribution? Great, you could use this year to convert that amount instead!
Roth conversions can be a good tool to use, but they're not always a good fit. We'll help you determine if this strategy is right for your circumstances.