Is A Roth IRA Conversion Right For You?

If you have your money in an individual retirement account, you’ve likely considering taking some out here and there for home improvements or emergencies. The fact that your contributions are tax-deductible are nice, but it locks in your money with relatively stiff penalties for needing it sooner.

Is A Roth IRA Conversion Right For You?

Conversion to a Roth IRA can be beneficial, if you fit the criteria, but it’s not strictly for everyone. Let’s take a look at the reasons you might want to convert your traditional IRA into a Roth IRA.


The biggest benefit to a traditional IRA is that your contributions are usually tax-free, but you’re penalized for taking out money before retirement. A Roth IRA gives you the freedom to make tax-free withdrawals as long as you’re 59 ½.

If you think you’re going to want to make withdrawals before retirement, conversion can be beneficial to saving you taxes.

After age 70 ½ in a traditional plan, you are required to make a withdrawal each year, called your RMD or required minimum distribution. This required distribution persists even if you pass away and your IRA is inherited. With a Roth plan, there are no minimum withdrawals except under inheritance.

Additionally, if your children inherit your Roth IRA, they won’t pay taxes on withdrawals as long as you had the plan for at least 5 years. Traditional plans require taxes to be paid on withdrawals, even when inherited.

As you can see, it’s all about freedom of withdrawals – whether your want to withdrawal without taxes or contribute without taxes, essentially.

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Do you want to grow without taxes?

A Roth IRA lets you keep your money saved longer because it doesn’t require you to take those RMDs. By not forcing you to take money out, you can allow it to gain interest longer without taxes, which can be beneficial if you don’t want to retire or you want to leave a larger amount of money to your inheritors.

This can be tricky to navigate, however; Roth IRAs can’t be accessed without penalty for 5 years after opening or conversion. If you suddenly find yourself in a need for money, you’ll get hit with not just the tax on your contributions but a tax on your withdrawal, negating the benefit of both types of retirement plans. If you’re concerned about needing to withdraw money before the 5 years is up, conversion might not be right for you, or you need to make sure you have additional income streams available to avoid the penalties.

Tax brackets

Because traditional IRAs don’t have their contributions taxed, you can sock away money without paying the IRS a red cent until you make withdraws. When you convert to a Roth plan, however, all of that money will be considered income on that year’s taxes.

For some people, this could push you into a higher tax bracket, which would increase your taxes and payments overall. Because of this, you could consider only converting part of your traditional IRA, enough to keep you from pushing past the limit of your tax bracket. This is where hiring a financial planner can help you make the best decision regarding your retirement, as running these numbers yourself can be a headache and if you do it incorrectly, you might end up worse off than where you started.

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It’s all about taxes

Ultimately, the IRA you want is about when you want your money to be taxed and how much flexibility you need. A traditional IRA allows you to contribute without tax, only getting penalized when you start making withdrawals. It also forces you to make withdrawals as you age, which makes the tax issue much more pointed.

A Roth IRA has its contributions taxed, but withdrawals aren’t. You’re also not forced to make withdrawals, save for in inheritance. The downsides are the taxable consideration when you convert and the potential for an increased tax bracket that year.

No matter where you’re at in planning your retirement, it’s never too early to hire a financial planner to help guide your money to where it serves you best. Even if you don’t think you’re at the point to even start an IRA, a strong financial guide can help you get from in-debt to debt-free and looking at retirement with a plan.

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