Making the Decision
Am I eligible to convert my existing IRA into a Roth IRA?
Yes. Almost everyone with an IRA (including Traditional, Rollover, SEP and SIMPLE IRAs) is eligible to convert to a Roth IRA. Even a former employer’s retirement plan (e.g. 401(k), profit sharing, and 403(b)) may be eligible to convert to a Roth IRA.
If I choose to convert, do I have to convert my entire IRA account?
No. You can convert all or any part of your account - the choice is yours.
If I convert to a Roth, can I still contribute to a Traditional IRA in the future?
Yes. Converting does not affect your ability to make future contributions to either type of IRA.
How will withdrawals from my Roth IRA be taxed?
You can withdraw money entirely tax-free after five years if you are over age
59½, disabled, or making a first-time home purchase (up to $10,000). If you
take money out before then, earnings will be taxable and, before age 59½,
may be subject to an additional 10% penalty tax.¹
What if I convert to a Roth, then discover that my income was too high to qualify for conversion?
You may reverse a conversion without any tax consequences - regardless of the
reason - by transferring the money (including earnings) back into a Traditional
IRA by the due date of your tax return, including extensions.
What are the main points I should consider in deciding whether to convert?
The bottom line is this: Will you come out ahead by paying taxes now on your
existing IRA funds in exchange for receiving all future earnings tax-free? The
answer depends on several factors...
- How will you pay the conversion tax?
In most cases, conversion
will not make sense if you must take the tax money out of your IRA. The amount
you pull out will lose the benefit of tax-free compounding and could be subject
to a penalty tax. Example A shows a scenario in which conversion taxes are
paid from non-IRA assets.
- What will your future tax bracket be?
The advantage of tax-free
withdrawals from a Roth IRA is reduced if you expect to be in a much lower
tax bracket when you begin withdrawals (see Example B). How do you predict
your future tax bracket? Your financial adviser can help you make an educated
- How long will your funds stay in the IRA?
Example B also shows
that the longer you let your IRA money accumulate before taking withdrawals,
the greater the advantage of the Roth IRA.
- What's the taxable amount in your existing IRA?
If you've primarily
made nondeductible contributions in the past, it may not cost you much to
convert. And the lower the tax bite, the wiser conversion may be.
- Do you plan to leave your IRA money to heirs?
Unlike other IRAs,
Roth IRAs do not require that you start taking money out when you reach age
70½. So you can let your funds compound tax-free for as long as you live,
and leave money to the next generation in a very tax-efficient way.
- Are you (or will you soon be) collecting Social Security?
so, you'll need to consider how a Roth conversion will affect the taxes due
on your Social Security benefits. Although Social Security payments are not
taxable if your overall income falls below certain limits, the taxable income
from a Roth conversion could put you over the top. On the other hand, any
future Roth withdrawals that are tax-free are not included in income, so they
will never affect the taxes due on your Social Security benefits.