Why Roth Conversion? Why Not?

If you had the choice between $1 million fully taxable as ordinary income or $850,000 tax-free, you would obviously choose the $850,000. Much of the nation’s wealth is similar to the $1 million, locked into IRAs and other tax-deferred retirement plans. You get an income tax deduction throughout all the decades you have contributed to your retirement plan, but when all of that money comes out, the IRS has a mortgage on your tax-deferred retirement accounts. The choice you have to make then, is would you rather pay now, while tax rates are low, or later when tax rates are likely to be higher?

Roth conversions allow you to lock in today’s lower tax rates on some or all of your tax-deferred retirement accounts. Now is a great time to make that conversion because tax rates are at a historic low.

Roth conversions are not good for everyone though. They are not the best choice if: you need access to the money within five years, you do not have funds outside the retirement account to pay taxes on the conversion, you want to leave your IRAs to charities, or you are using IRA distributions to fund a life insurance policy or leave a larger tax-free inheritance. Most important of these being if you do not have the money to pay the income tax on the conversion.

Roth IRA conversions are ideal for candidates who want to take advantage of the low, certain tax rates currently, leave a tax-free legacy for heirs, and who want to control when they make withdrawals.

See Rob Russell, The Death of Roth Conversions, U.S. News, Mar. 8, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.