6 Reasons You Should NOT Do a Roth Conversion

Roth IRAs come with some great tax advantages, but converting a traditional IRA to a Roth doesn’t make sense for everyone.

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With the end of 2020 approaching, many people will turn their sights toward year-end tax planning. A hot topic for high-income individuals and couples is whether to convert a traditional individual retirement account (IRA) into a Roth IRA. While there is no shortage of guidance available from financial advisers and accountants to help identify where a Roth IRA conversion makes sense, there are also plenty of scenarios where it doesn’t.

A benefit of a Roth conversion is that it can allow you to pay taxes on traditional IRA assets now instead of later if you expect to be subject to a higher marginal tax rate down the road. By paying the income tax now, your contributions and earnings grow tax-free into the future inside the Roth IRA.

Another benefit is that you can withdraw your contributions — but not the earnings — from the account at any time (provided you have met the five-year rule discussed below). Also, moving to a Roth IRA also means you won’t have to take required minimum distributions (RMDs) on your account when you reach age 72. (Other than your spouse, your heirs will most likely have to take RMDs on a Roth IRA they inherit from you, but they won’t have to pay taxes on them.)

But for plenty of people, this strategy doesn’t make sense and therefore is ill-advised. If you are considering this strategy, please consider these six scenarios before making your decision:

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Bud Boland, CFP®
Wealth Adviser, CI Brightworth

Bud Boland is a Wealth Adviser at CI Brightworth (opens in new tab) and has devoted his career to working with high net worth and high-income individuals and families. Bud works closely with clients to understand their needs and develop customized financial plans to help them reach their short- and long-term goals. Bud is a CERTIFIED FINANCIAL PLANNER™ practitioner and received his Bachelor of Science in Financial Management with an emphasis in Financial Services from Clemson University.