Often times, yes. There has been a lot written about converting your Traditional IRA into a Roth IRA. Even so, many people are still confused as to whether or not it is the right move for them. There are many important factors to consider, such as your age, current and future tax bracket, ability to pay conversion taxes, wealth transfer goals, and diversification of taxes. Let’s take a look at each one.
Age- The younger you are, the more likely you are to benefit from a Roth Conversion. While there are several factors that contribute to this, the most important one is that you have longer to “catch-up” from paying taxes now.
Tax bracket- The rule of thumb is to convert to a Roth if you will be paying higher taxes in retirement than you are now. Unfortunately, it’s quite difficult to estimate future spending habits and tax code changes. Rarely do you know exactly how much income you will need in retirement, but often times it’s more than you would expect. Taxes are a moving target, and it’s difficult to know what they will be 20 years from now. Unless you have a very good idea that your taxes will be lower in retirement than they are now, a conversion might make sense.
Ability to pay taxes- If you can pay the taxes with funds from outside of your IRA, consider a conversion. When you convert your IRA to a Roth, you will have to pay ordinary income tax on the conversion amount. If you can’t pay these taxes from outside of the IRA, it’s generally not best to convert.
Wealth Transfer- Regardless of age, it might be in your best interest to convert if your goal is to leave your account to your heirs, instead of spending the money. The Roth has several estate planning advantages, and you won’t have to take annual distributions when you turn 70 ½.
Tax Diversification- The best way to hedge against uncertain tax risks, is to have various accounts that are taxed differently. Holding an IRA, Roth, and taxable account provides you with several funding options in retirement, helping to smooth out the risk of incorrectly predicting changes in the tax code.
Finally, when done correctly, a Roth Conversion can be a wise move and a significant wealth planning tool that reduces taxes, preserves wealth, and endows future generations.
For more information on Roth Conversions, please read the Wall Street Journal’s excellent article by Kelly Greene, “Making a Good Deal for Retirement Even Better.”
The expressed views are that of only Chacon Diaz & Di Virgilio and are for informational purposes only.. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Chacon Diaz & Di Virgilio recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.