Retirement Planning Debate: To Convert or Not Convert Your IRA

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By Kyle B., Branch Manager and Guest Blogger

I often have conversations with my clients about whether they should convert their traditional IRA or 401(k) to a Roth IRA. While the thought of not having to worry about unwanted income due to your IRA’s required minimum distribution (RMD) or ever being taxed again on those funds might be enticing, there is much to consider with a Roth IRA conversion and it can be a difficult choice.

Pay Taxes Now or Later?

The big quandary with converting to a Roth IRA is taxes. You could keep the funds in your traditional IRA account or 401(k) and continue receiving those nice tax breaks for the years you contribute. But, one day, when you start making your IRA withdrawals, you’ll have to pay-up, and let’s just hope you won’t be in a higher tax bracket when that time comes.

The beauty of converting all or a portion of your traditional IRA or 401(k) to a Roth IRA is that you don’t have to pay those taxes later. You pay the tax now on what you convert, and then just let the funds grow tax free.

Paying Taxes to Convert to a Roth IRA

One of the questions you should ask yourself before making the decision to convert is whether you can afford to pay the taxes now. Depending on the assets in your 401(k) or traditional IRA, you could end up with a significantly large tax bill if you convert all of it. To avoid paying a huge tax bill, some of my clients have elected to make small conversions over time. That way they don’t have to make the unfavorable decision of borrowing money or withholding the anticipated tax amount from the IRA account to pay the conversion tax.

Roth IRA Income Limits

You have the ability to invest in more than one type of IRA account, but you should be aware of income limits that apply to Roth IRAs. You can always convert assets to a Roth, but if your income is too high, you may not be able to make regular contributions going forward. These limits are important to consider if you are contemplating converting all of your assets and you rely heavily on the tax deductions you get each year when contributing to your traditional IRA.

Reversing Your IRA Conversion

There are many considerations and nuances that factor in the decision to convert. The good news is that converting to a Roth IRA is not set in stone. You have the option to recharacterize your IRA, meaning you can move the assets back to a traditional IRA. Some people do this when their taxable income is higher than they initially anticipated or if the account value took a large dip after the conversion.

Whatever you decide, consult a tax professional and utilize your local Scottrade team for support when converting or recharacterizing your IRA accounts.

Why have you converted to a Roth IRA?


Also of Interest:

Kyle B. has been with Scottrade since 2004 He is the branch manager in Clearwater, Fla.

Articles, commentary, and opinions expressed on this site are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author.

Scottrade does not provide tax advice. This blog is for informational purposes only and Scottrade is not responsible for any errors or omissions. The information is subject to change without notice and should not be construed as a recommendation or investment advice. Please consult your tax, or legal, advisor for questions concerning your personal tax or financial situation.


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