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Who Should Not Convert to a Roth IRA?

Questions to Ask Yourself Before Making the Roth Conversion Decision


If you have a traditional individual retirement account or IRA, you may have considered converting to a Roth IRA. With a conversion, you move money out of the traditional IRA, pay taxes on the funds at ordinary federal and state rates, and move it into the Roth where it will grow tax-free. You can make future withdrawals tax-free as long as you meet certain qualifications. A Roth IRA conversion can make a lot of sense, but there are certain cases when it makes no sense at all. Before you convert to a Roth, ask yourself these questions.

Am I near retirement and in need of IRA income?

If you're approaching retirement or and need your IRA money to live on, it's not wise to convert to a Roth. Because you are paying taxes on your funds, converting to a Roth costs money. It takes a certain number of years before the money you pay upfront is justified by the tax savings. If you are taking retirement income, you increase that timeline. To get a sense of whether you are better off converting, a Roth conversion calculator can help. (You can find calculators on brokerage sites, this good basic Roth conversion calculator is from TIAA-CREF.)

Can I afford the taxes?

A Roth IRA conversion can be costly, because you must pay taxes on your existing IRA. Ideally, the money should not come out of your retirement savings. If you have to use funds from your traditional IRA in order to pay the taxes it will cost you to convert to a Roth, you're better off letting the funds sit tight.

Do I want to pay the taxes?

Sometimes making a good financial move can be difficult to do. That’s the feeling that many traditional IRA owners get when considering a Roth IRA conversion. Can you imagine someone has $300,000 in an IRA and right upfront they're giving up $75,000 of that IRA? A Roth IRA conversion may look good on paper but in the real world may be more complicated.

Will I be in a lower tax bracket in the future?

If you think you will retire in a lower income tax bracket than you are in now, it doesn’t make sense to convert. You will pay higher taxes on the conversion than you would if you were to withdraw the money from your traditional IRA at retirement.

A Roth IRA conversion can be a good idea for some IRA investors. Consider your potential conversion carefully before making any moves.

The content on this site is provided for information and discussion purposes only. It is not intended to be professional financial advice and should not be the sole basis for your investment or tax planning decisions. Under no circumstances does this information represent a recommendation to buy or sell securities.

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