Should You Consider a Roth Conversion?

A Roth conversion can shift taxes from the future into the present. Whether that tradeoff is useful depends on far more than a single year’s tax bracket.

Understand the basic tax tradeoff

A conversion from a traditional IRA to a Roth IRA generally causes previously untaxed amounts converted to be included in taxable income for the year of conversion. Qualified Roth IRA distributions can receive tax-free treatment when applicable requirements are satisfied.

Look for planning windows

Some households experience years when taxable income is temporarily lower—for example, after retirement but before other income sources begin. A conversion may be worth evaluating during such a period, but increasing income can also affect other tax items and income-related costs.

Consider the source of the tax payment

Paying conversion-related taxes from assets outside the retirement account may preserve more assets inside the Roth, but doing so uses cash that could have served other goals. Liquidity should be evaluated before implementation.

Think beyond the current tax year

Future tax rates are uncertain. Required distributions, Social Security, pensions, investment income, charitable plans and heirs can all influence the analysis. A conversion is not automatically beneficial merely because Roth assets have attractive tax characteristics.

Coordinate before executing

Conversions can be difficult or impossible to reverse under current rules, and tax consequences depend on individual circumstances. Confirm the tax calculation, IRA basis and implementation details with a qualified tax professional before completing a conversion.