There's a lot of buzz around the Roth IRA, and for good reason. The Roth IRA offers certain advantages that are unavailable through a traditional IRA. But the Roth IRA also has its own set of limitations.
The main difference between the traditional IRA and the Roth IRA is the role of taxes. Contributions to a traditional IRA are tax-deductible, for those who qualify. For example, if you earn $39,000 annually and contribute $3,000 to a traditional IRA, you will be taxed on only $36,000 in income. However, if you contributed that money to a Roth IRA instead, you'd still be taxed on your full $39,000 income.
That doesn't mean that a traditional IRA is always more advantageous on the tax side. You have to pay taxes on money you withdraw from a traditional IRA after you reach retirement age, and the Internal Revenue Service makes a traditional IRA subject to additional taxes if you use it to invest in collectibles (the IRS defines collectibles as "artwork, rugs, antiques, gems, coins, and similar items") or if you make excess contributions, take early withdrawals or allow an excess amount to accumulate in the account. This means that a traditional IRA holder has to be vigilant to minimize taxes on the account.
The owner of a Roth IRA, meanwhile, has to worry about taxes only once, when placing money into the account. All profits subsequently accumulated in a Roth IRA and all amounts withdrawn from the Roth IRA after retirement age are not subject to taxes. Even if the Roth IRA is passed on to your beneficiaries, it's still tax-free.
Judge the differences between a traditional IRA and a Roth IRA by calculating the relative benefit of tax deductions today versus a tax-free income tomorrow. Many scenarios can play into this calculation, because even slight variations in how much money you feed into an IRA account (Roth or traditional) will affect your tax bracket at retirement. A good way to determine which IRA account is right for you is to use About.com's calculator, which allows you to compare the two side-by-side, based on assumptions such as withdrawal age, rate of return on IRA investments and age of death.
For investors who have traditional IRAs and are considering the relative benefits of the Roth IRA, financial websites like MotleyFool.com feature calculators that will analyze your particular scenario to determine the potential advantages of the Roth.
You'll notice that it makes more sense to convert a traditional IRA to a Roth IRA if your tax bracket at retirement will be above 30%. However, the Roth IRA doesn't push you into a higher tax bracket. On the contrary, because Roth income is non-taxable, it may actually push you into a lower tax bracket, an environment that would favor the traditional IRA.
If you can anticipate a fairly high income (for example, high five figures or above) at retirement, the Roth IRA will beat out the traditional IRA. However, if you anticipate a lower retirement income, there are many variables that could determine the tax bracket in which you'll land (and consequently the IRA that would be better for you). In that case, speaking to a financial planner to anticipate your retirement tax bracket will serve you well in your decision to convert IRAs.