[ad_1] Thinking about converting your retirement account to a Roth IRA? It’s easy to see why the Roth IRA is so incredibly popular. Contributions to a Roth IRA are made with income that has already been taxed, meaning there’s no initial tax benefit, but the money you have in a Roth grows tax-free over time. Roth IRAs don’t come with Required Minimum Distributions (RMDs) at age 72 like a traditional IRA either, so you can continue letting your money grow until you’re ready to access it. When you do decide to take distributions from a Roth IRA, you won’t have to pay income taxes on that money. You already paid income taxes before you contributed, remember? These are the main benefits of a Roth IRA that set this account apart from a traditional IRA, but there are plenty of others. With all of this in mind, it’s no wonder so many people try to convert their traditional IRA into a Roth IRA at some point during their lives. But, is a Roth IRA conversion really a good idea? This kind of conversion can certainly be lucrative over time, but you should definitely weigh all the pros and cons before you decide. #mainContent a,#mainContent h3{font-weight:500!important}#mainContent h2{margin-top:3em;}#mainContent h3{margin-top:2.5em}#mainContent h3 span{font-weight: 300;letter-spacing:1px;}#mainContent h2{border-left:4px solid #3696da;padding:7px 0 7px 11px}ul.toc,ul.nextSteps{margin:.75em 0;list-style:none}ul.toc{padding:0 3.5em 2em; background:#f4f4f4;margin-top:0;border-left:4px solid #3696da;}ul.nextSteps{padding:0 .85em;margin-bottom:0px;margin-top:0}ul.toc li:before,ul.nextSteps li:before{content:””;border-style:solid;display:block;height:0;width:0;position:relative}ul.toc li:before{border-color:#3696da transparent transparent transparent;border-width:.35em .5em 0 .5em;left:-1.5em;top:.8em}ul.nextSteps li:before{border-color:transparent #ffab00;border-width:.5em 0 .5em .35em;left:-.85em;top:1.12em}#mainContent ul.toc li a,#mainContent ul.nextSteps li a{color:rgb(33,33,33);font-weight:300!important}#mainContent ul.nextSteps li a{border-bottom:2px solid #ffab00}#mainContent ul.nextSteps li a:hover{background:rgba(255,171,0,.3);text-decoration:none}<br /> Table of Contents When Would You Want to Convert to a Roth IRA? When Would You Not Want to Convert? Roth IRA Conversion Rules You Need to Know What is the Backdoor Roth IRA and How Does It Work? Modeling IRAs in Your Own Plan Steps to Convert an IRA to a Roth IRA Roth IRA Conversion Examples Summary When Would You Want to Convert to a Roth IRA? Converting an existing traditional IRA or another retirement account to a Roth IRA can make sense in many different situations, but not all the time. At the end of the day, the value of this investing strategy depends on your unique situation, your income, your tax bracket, and the financial goal you’re trying to accomplish in the first place. The most important detail to understand is that, when you convert another retirement account to a Roth IRA, you will have to pay income taxes on the converted amounts. It can make sense to pay these taxes now to avoid more taxes later on, but that depends a lot on your tax situation now and what your tax situation may be like later in life. The main scenarios where converting to a Roth IRA can make sense include: You will likely be in a higher tax bracket than you are now. If you are finding yourself in an especially low tax bracket this year or simply expect to be in a much higher tax bracket in retirement, then converting a traditional IRA to a Roth IRA can make sense. By paying taxes on the converted funds now — while you’re in a lower tax bracket — you can avoid having to pay income taxes at a higher tax rate once you reach retirement and begin taking distributions from your Roth IRA. (Not sure about your future tax brackets? Use the NewRetirement Planner to approximate your future taxable income, rates, expense and more. This comprehensive tool puts the power of planning in your own hands.) Lifetime tax prior to performing Roth conversions You have financial losses that can offset tax liability from the conversion. Converting another retirement account into a Roth IRA will require you to pay income taxes on the converted amounts. With that in mind, it can make sense to work on a Roth IRA conversion in a year when you have specific losses that can be used to offset your new tax liability. You don’t want to begin taking distributions at age 72. If you don’t want to be forced to take RMDs from your account at age 72, converting to a Roth IRA can also make sense. This type of account doesn’t require RMDs at any age. (You can use the NewRetirement Planner to help you assess your income needs. See your taxable income for every future year and assess whether you need the income to cover expenses.) You’re moving to a state with higher income taxes. Imagine for a moment you’re gearing up to move from Tennessee — a state with no income taxes — to California — a state with income taxes as high as 12.3% In that case, it could make sense to convert other retirement accounts to a Roth IRA before you make the move and begin taking distributions. You want to leave a tax-free inheritance to your heirs. If you have extra retirement funds and worry about your heirs facing tax liability on an inheritance, converting to a Roth IRA can make sense. According to Vanguard, “the people who inherit your Roth IRA will have to take annual RMDs, but they won’t have to pay any federal income tax on their withdrawals as long as the account’s been open for at least 5 years.” These are just some of the instances where it can make sense to convert another retirement account into a Roth IRA, but there may be others. Also note that, before you do anything drastic or begin a conversion, it can be smart to speak with a tax advisor or financial planner with tax expertise. At the very least, be sure to model the conversion as part of a comprehensive written retirement plan. The NewRetirement Planner enables you to try out specific conversion strategies in the context of your entire financial situation. Assess the conversion on your tax liability, net worth at longevity, and cash flow. When Would You Not Want to Convert? Considering a Roth IRA conversion comes with immediate tax consequences, there are plenty of scenarios where doing one doesn’t make any sense. There are also
