Does It Pay to Convert to a Roth IRA?

by A. Low

Converting your traditional IRA into a Roth has definite advantages. Traditional IRAs require you to pay taxes on funds you withdraw in retirement, but Roth IRAs don’t. Because Roth IRAs are funded by after-tax dollars, any money you withdraw in retirement stays out of the hands of Uncle Sam. However, a tax break in retirement may not be enough to justify a conversion. Your income, age, retirement plans and cost of conversion will all determine whether switching to a Roth IRA is a good choice for you.

Traditional vs. Roth

Before you convert, it helps to understand the differences between a traditional and a Roth IRA. With your traditional IRA, you may deduct your contributions from your taxable income — meaning when you make a contribution in 2011, for example, you receive a tax break for 2010. However, when you withdraw from your traditional IRA, you must pay taxes on it. A Roth IRA works in the opposite way. Though you receive no tax break when you invest in a Roth, you don’t have to pay taxes on your withdrawals.


Although prior to 2010, your annual individual income had to be less than $100,000 to convert to a Roth IRA, the rules have changed. Now, there is no income limit to be able to convert a traditional IRA to a Roth. Once you have converted your account, you must be at least 59-1/2 to withdraw earnings from your Roth IRA without paying a penalty. Your account must also be at least five years old to withdraw earnings penalty-free. Once you have converted, however, you can withdraw your contributions penalty-free.


When you convert, you must pay taxes on any untaxed amounts in the traditional IRA. This means that if you’re in a high tax bracket now, you may have to pay a significant amount of taxes on your conversion. If you don’t have enough income to afford your tax bill, you may be better off keeping your traditional IRA. However, there can be long-term tax benefits to converting. If you think you will be in a higher tax bracket during retirement than you’re in now, it makes sense to convert to a Roth IRA because you’ll be able to keep more of your savings.

Other Considerations

If you’re receiving Social Security benefits or Medicare, converting your IRA to a Roth can put you in a higher income bracket and reduce your benefit amounts. Also, if you have a child in college, your conversion will appear to the government as an increase in income, which may cause your child to lose financial aid eligibility.

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