Ask Kim
Should You Convert to a Roth IRA?
Ask yourself these five questions to determine whether you should move your money from a traditional IRA to a Roth.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
March 8, 2010
What do I need to consider when deciding whether it’s worthwhile to convert a traditional IRA to a Roth?
You need to ask yourself five key questions before you move your money to a Roth IRA:
Related Links
- SPECIAL REPORT: Roth IRA Conversions for Everyone
- Why You Need a Roth IRA
- How to Finance a Roth Conversion
- The Gift of a Roth
1. Can you afford to pay the tax on the conversion with money from outside your IRA? You must pay taxes on the amount in a traditional IRA (except for any nondeductible contributions you have made) that you convert to a Roth, but then you’ll be able to access the money in the Roth -- including all future earnings -- tax-free in retirement.
The conversion won’t be as good a deal, though, if you need to tap the account to come up with the cash. Any money you withdraw now to pay the tax bill won’t be around to produce that glorious tax-free income. Plus, if you’re younger than 59½ when you pull the money out to pay the tax, you’ll be hit with a 10% penalty . . . on top of tax on the withdrawal in your top bracket. One benefit of converting in 2010 is that you can delay paying the tax until you file your returns for 2011 and 2012 (split evenly over those two years), giving you extra time to save for the bill.
See FAQs on the New Roth Conversion Rules for more information about the tax bill.
2. Do you expect to be in a higher tax bracket in the future?
If you do, a Roth IRA is an easy decision: You pay the taxes at your lower bracket now and take the money out tax-free later, dodging the higher tax bill that would otherwise apply at that time. It’s particularly valuable to convert to a Roth now if your income is unusually low -- if, for example, you were unemployed for part of the year -- so you’ll pay the taxes at a lower rate.
Although you can pay the tax on conversions made in 2010 over 2011 and 2012, you also have the option of paying it in full when you file your return for 2010, which could make sense if you expect your tax bracket to be lower this year than it will be in the following two years. Just remember that money you convert will be added to your other income for the year, which could push you into a higher tax bracket.
See What You Need to Know About Roth Conversions for more information about making the switch.
3. Will you need your IRA money in retirement, or do you think you’ll be able pass most of it on to your heirs?
Converting to a Roth IRA can be a particularly good deal if you won’t need to tap the account for your retirement expenses every year. Unlike traditional IRAs, Roth IRAs never force you to take required minimum distributions, and heirs inherit the money income-tax free. (Those who inherit traditional IRAs must pay tax on withdrawals in their top tax brackets.)
4. How long do you plan to keep the money in the account?
The longer you keep the money in the account, the more you can benefit from tax-free growth. See The Complexities of Roth Conversions for more information about the calculations that can help you decide whether a Roth is right for you, especially if you’re retired now or expect to retire soon.
5. Do you plan to pay college bills soon?
Converting to a Roth increases your taxable income for the year of the conversion -- or for 2011 and 2012 if you make a 2010 conversion and choose to spread the tax bill over those years. That could affect your child’s ability to qualify for financial aid. See
For more information about Roth conversions, see our Roth Conversions for Everyone special report.
Reader Comments (13)
Posted by: JOE at 03/09/2010 03:18:51 PM
How does one decide when just starting out whether to do a Traditional or a Roth IRA? I have a daughter asking me questions about this and other stuff. Can you have both?
Posted by: Rosie at 03/09/2010 03:28:44 PM
Even for seniors that have a husband or wife I think if you could covert and pay taxes from outside the IRA you should convert up to the amount to stay in the same tax bracket because when your partner passes you will be in a higher bracket most likely.
Posted by: JW at 03/09/2010 10:55:18 PM
I am considering converting my traditional IRA to a Roth IRA. I realize that I will need to pay taxes in 2011 on the amount that I convert. Will the IRS apply a penalty on my taxes owed if I do not pay estimated tax for the amount I plan to convert?
Posted by: Gnatman at 03/10/2010 09:42:11 AM
I built a spreadsheet to compare the comversion amounts and resultant tax in 2011/2012. The current tax brackets were utilized. I added the Required Minimum Distributions (RMDs) starting at age 70 1/2, and the resultant tax on those. Comparing the future value of the extra tax paid in 2011/2012 versus the extra tax paid for RMDs was eye opening. Conclusion was that older individuals with large balances probably get no benefit from the conversion unless they intended to leave to another generation. Conversion for younger individuals with smaller balances was usually indicated. The spreadsheet also lets you chose differing conversion amounts to stay under a tax bracket jump or see what increased tax it would cause.
Posted by: skip Schweizer at 03/10/2010 02:43:00 PM
Watch out for the impact on social security medicare premium. You can incur a surcharge if your income exceeds $170,000. Be aware that the social security income "means" test includes all tax exempt income from municipal bond funds.
Posted by: patricia at 03/10/2010 08:09:15 PM
I'll be 59.5 at the end of May this year should I switch to a roth at this time...since I'll be taking yearly withdrawals from this account to assist with my small pension?
Posted by: kevin mccormally at 03/11/2010 08:39:04 AM
Kevin McCormally of Kiplinger here with an answer for Joe who wonders how his daughter should decide between contributing to a traditional IRA or a Roth...and whether it's permissible to do both.First, it's okay to split your contributions between a traditional IRA and a Roth...any way you want, as long as the total doesn't exceed $5,000 (it's $6,000 a year for folks who are at least 50 years old by the end of the year). As for which to choose, a key decision is whether you think you'll be in a higher tax bracket when you retire than you are when you make the contribution. If so, the Roth is a no-brainer because you pass up a tax break at today's rate to get one at tomorrow's higher rate. Since your daughter is just starting out, I presume she's not making the big bucks (yet) and thus is in a relatively low tax bracket. That means passing up the deduction for the traditional IRA contribution won't really cost her that much, and the odds favor her being in a higher bracket in retirement. And, with years to save, the prospect of tax-free -- versus tax-deferred -- earnings are sweet indeed. I think you can see which way I'm leaning.....
Posted by: Tom at 03/14/2010 01:17:03 AM
I don't understand why ppl think you will be in a higher tax bracket when you retire? I'm 37 now, and putting into a traditional 401k. When I retire at say 65, I will probably need less money than I need now to support my family of 4. Say I only need 60k to live off of instead of 100k. Then my tax bracket will be lower than it is now. Is it only people that want to retire and spend like mad that have to worry about the higher tax bracket?
Posted by: Max at 03/31/2010 11:20:16 AM
Tom, it's possible [likely...] that the gov't could raise tax rates in the future. So, if you envision that you might be in the same income bracket at retirement as you are now, then you'd essentially be in a higher bracket by default due to the change in tax rates.
Posted by: bob at 04/02/2010 04:48:16 PM
I committed to convert my reg IRA to a Roth on 4-17-09. The balance was 122,500 and Vanguard sent approx. 12,500 for taxes to the IRS because I neglected to mark a box properly. The result is I have a conversion of about $110,000 with a tax basis of approx. $10,000 making about $100,000 taxable. It has since grown to $170,000. Because my income with this conversion is above $150,000 I'm unable to take a $20,000 loss on real estate income during 2009 but can carry it over to 2010 as I understand it. I'm 67 years old with an estate of $1.5 million and an income of about $50,000 per year and in great health. Should I follow through with the conversion? Thanks.
Posted by: Tammy at 04/14/2010 07:03:55 AM
When was the deadline to convert my traditional IRA to a Roth IRA for 2009? Is it already too late or can I still do it by April 15, 2010?
Posted by: Ted at 04/25/2010 08:15:55 AM
I am 66 recieve a pension have NOT applied for social security my wife also recieves a small pension and social security. My thought is to convert part of my IRA to a Roth now. Two reasons, first I don't recieve social security (lower income), second after the rop in the market my IRA (converted 401k) has droped in value (buy low). I am in good health. We are comfortable money wise so I plan to wait till 70 to apply for social security. That way if I die first my wife can step up to my SS. ps:I feel taxes are going nowwhere but UP.
Posted by: Don Wynne at 05/13/2010 04:49:09 PM
Will RMD count towards the $250,000. in the new health care program count towards the new medicare tax? Thanks.