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Roth IRA conversions

Roth IRAs have a lot going for them, including the ability to withdraw earnings tax-free and no required minimum distributions. But there are a few things to keep in mind if you're interested in converting your traditional IRA to a Roth IRA.

Conversion considerations

You have to pay income taxes on the money you convert from the pre-tax balance of your IRA. It's possible that the conversion also can bump you into a higher tax bracket.

You can maximize use of the retirement savings in your traditional IRA if you don't use a portion of it to pay the conversion taxes. Drawing from a non-retirement account lets you keep more of the savings you've already built up for retirement applied for their intended purpose.

You can convert just part of your traditional IRA assets. Having both traditional and Roth IRAs gives you tax diversification. It may even help you avoid falling into a higher tax bracket.

You may face taxes and penalties if you withdraw within five years of a conversion. If you think you'll need the money in your IRA in five years or less, a conversion may not be the right choice for you.

You should include the tax rate you expect to pay in the future in your evaluation. If you expect your tax rate to go up when making withdrawals in retirement, converting may be for you. If you think it will go down, then the opposite holds true.

 

 

Calculate the costs and benefits of a conversion

Use our Roth IRA conversion calculator to get a sense of the potential benefits and costs this move may have for you.

Roth IRA conversion calculator

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All investments are subject to risk, including the loss of money you invest.

If you take withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax on withdrawals. Note that the amount you convert to a Roth IRA is not subject to the 10% penalty.

We recommend that you consult a tax or financial advisor about your individual situation.