Roth IRA Utopia: Is Now the Right Time to Convert?
With the new tax law in place, there are several reasons why converting from a traditional IRA to a Roth could make sense for you now. But here are five critical points you need to keep in mind.


To convert or not to convert? That’s the big question savers should be asking themselves right now as we all adjust to the major reforms of the Tax Cuts and Jobs Act, the most extensive tax rewrite enacted in decades.
If you’ve been thinking about tax diversification — moving your money into more than one savings bucket to avoid a huge tax bill in retirement — the act’s new tax brackets and lower tax rates may provide the nudge you needed to convert a traditional IRA to a Roth IRA.
Let’s say you’re filing as a single individual, and your taxable income is $150,000. In 2017, your tax rate was 28%. In 2018, your tax rate will be 24%. If you’re married filing jointly, a $150,000 taxable income puts your 2017 tax rate at 25%. In 2018, it will be 22%.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That’s a substantial savings. Which is why many advisers are talking to their clients about using this opportunity to convert some of their tax-deferred savings (from traditional IRAs, 401(k)s, etc.) to a Roth account as a hedge against future tax hikes.
Yes, the notion of paying taxes on that money now might be a bit painful. No doubt you’ve enjoyed watching all or most of your savings grow untouched by the IRS for so long. But remember: The dollar amount you see at the bottom of your IRA statement every quarter doesn’t all belong to you. Uncle Sam will come calling in a few years anyway, when you start making withdrawals — or at 70½, when you must begin required minimum distributions (RMDs).
Converting to a Roth IRA will guarantee that you owe no additional income tax on the converted funds — as well as no taxes on any money those funds earn before you withdraw them — during retirement. The balance in your portfolio will be yours to use as you wish. There are no RMDs with a Roth, so if you don’t need the money, you can let it grow untouched to leave to your heirs.
Of course, you should consult with your tax professional to determine what the new tax rates will mean for you, and if it makes more sense to pay income tax now or to wait until after retirement. So, if you’ve been curious about doing a Roth conversion, here are some things you should know:
1. There are rules.
There are different requirements for Roth contributions and Roth conversions regarding when you can access your funds. Generally, converted assets in a Roth IRA must remain in the account for five years (if over 59½) to avoid taxes on any gains, so it’s strongly recommended that you do each conversion with money you’re sure you won’t need for at least that long. If you need to withdraw the money within that timeframe (each conversion has its own holding period), you could end up owing additional taxes you hoped to reduce.
2. Maintain discipline and don’t touch the rollover money.
If the same trustee controls your old and new accounts, you can request a same-trustee transfer. Otherwise, you can arrange a trustee-to-trustee transfer. If you choose to do your own rollover, move the conversion money to your Roth IRA within 60 days. If you miss the time limit, the IRS will tax the withdrawal as income, and if you’re younger than 59½, you’ll also have to pay a 10% early withdrawal penalty.
3. You can’t change your mind.
In the past, you could undo your decision to move to a Roth, but the new reforms got rid of this “recharacterization” option. Be cautious: Make sure the amount you convert won’t bump you into a higher income tax bracket and that you’ll be able to pay the taxes on your conversion.
4. Watch out for a domino effect.
If you do push yourself into a higher tax bracket with your conversion, and you’re already in retirement, the additional income could also affect the taxes on your Social Security and what you pay for Medicare.
5. Include estate planning in your decision-making.
Talk to your financial adviser, estate attorney and/or tax professional about how your heirs’ taxes could be affected if they inherit a Roth versus a traditional IRA. Note that the five-year holding period for qualification continues after the owner’s death.
Although conventional wisdom suggests that a worker’s gross income will decline in retirement, taxable income sometimes does not. Think about it. You’ll be collecting Social Security and pension payments, maybe do some part-time work or decide to sell some assets. When your children are grown or if your mortgage is paid, you’ll lose some valuable tax deductions and credits. And if your spouse dies, your filing status will change.
No one knows what future rates will be, but many of the breaks offered under the current tax plan will expire in 2026. That window may be even narrower if there’s an administration change after the 2020 presidential election. And many experts predict that rates eventually will have to go up to help pay for the nation’s $21 trillion (and growing) debt.
Diversifying your tax situation with a Roth can help you prepare for whatever may happen down the road. Just as proper asset allocation offers proactive protection for your portfolio, figuring out the right pre-tax/after-tax mix can keep more of your hard-earned money now and in retirement. Talk to your adviser about the pros and cons of adding a Roth IRA to your financial plan.
Kim Franke-Folstad contributed to this article.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Isaac Wright, president of Financial Dynamics & Associates, is a financial adviser and licensed insurance professional with a focus on retirement planning and asset preservation for families and retirees. He has assisted families and retirees in reaching their financial, retirement and estate planning goals for more than 15 years. He is the author of Navigate Your Way to a Secure Retirement.
-
Last Call for Fortnite Refunds: Parents Can Still File a Claim
The FTC is sending out $126 million in refunds to families whose kids were charged for unwanted items in Fortnite — and there’s still time to file a claim.
-
Stock Market Today: Stocks Swing as Trump Scraps Canada Trade Talks
Despite a mid-afternoon slip, the S&P 500 and Nasdaq ended the day at new record highs.
-
Why Smart Retirees Are Ditching Traditional Financial Plans
Financial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
To My Small Business: Well, I've Been Afraid of Changin', 'Cause I've Built My Life Around You
While thinking about succession planning might feel like anticipating a landslide (here's to you, Fleetwood Mac), there are strategies you can implement to manage the uncertainty and the transition.
-
These Are the Key Tariff Issues to Watch in Coming Months
While they're not dominating headlines right now, tariffs are not over. Some key dates are coming up fast that could upend markets all over again.
-
Technology Unleashes the Power of Year-Round Tax-Loss Harvesting
Tech advancements have made it possible to continuously monitor and rebalance portfolios, allowing for harvesting losses throughout the year rather than just once a year.
-
The Fiduciary Firewall: An Expert's Five-Step Guide to Honest Financial Planning
Armed with education and awareness, you can avoid unethical people in the financial industry by seeking fee-only fiduciaries and sharing your knowledge with others.
-
How Private Capital Could Be the Key to Rebuilding America
Private capital investment in infrastructure could be a more efficient and effective alternative to government funding, potentially stimulating the economy during uncertain times, creating jobs and delivering projects on time and within budget.
-
Real Estate Bridge Funds: An Expert Guide to Investing in a Volatile Market
Investors looking for passive income are buying into these funds, which offer capital to borrowers for short-term financing.
-
Bill Bought a Fridge, and Then His Nightmare Began
A Lowe's customer reached out to me after he encountered the retailer's 48-hour return window for major appliances when his brand-new fridge turned out to be defective.