Is a Roth Conversion Right for You? But Be Careful, They Can No Longer Be Undone!Back to all blogs
- Conversion Timing
- Why Convert?
- When to Convert?
- Issues to Consider Before Making the Decision
Timing is everything, and a favorable time to make a traditional IRA to Roth IRA conversion is a year when your income is abnormally low or the value of your traditional IRA has declined. You can also convert portions of your traditional IRA over a number of years, thereby gradually converting the traditional IRA to a Roth IRA, spreading the tax liability over a number of years, and keeping it in a lower tax bracket. If you previously made non-deductible contributions to a traditional IRA, those amounts can be converted tax-free but must be converted ratably with the other funds in the traditional IRA.
Many taxpayers overlook some great opportunities to make conversions, such as years when your income is abnormally low or a year when your income might even be negative due to abnormal deductions or business losses. Even the new higher standard deductions may offer a taxpayer the opportunity to convert some or all of their traditional IRA to a Roth IRA without any conversion tax.
Everyone’s financial circumstances are unique, and issues to consider include:
- Will there be enough years before retirement to recoup the conversion tax dollars through tax-free accumulation?
- Is your income low enough or are your deductions high enough to enable a tax-free or minimal tax conversion?
- Will you be in a lower or higher tax bracket in the future?
- Where would the money to pay the conversion tax come from? Generally, it must be from separate funds. If it is taken from the IRA being converted, for individuals under age 59½, the funds withdrawn to pay the tax will also be subject to the 10% early distribution penalty, in addition to being taxed.
- It might be appropriate for you to design your own custom conversion plan over a number of years, rather than converting everything at once.