Why Convert?

If you’re investing in a 401(k) or an individual retirement account (IRA), earnings on your withdrawals will be taxed. And once you reach the age of 72 (70 ½ if you reach 70 ½ before January 1, 2020) you must begin taking required minimum distributions from your IRA.

But you can also convert to a Roth IRA. These retirement savings vehicles are funded with your after-tax dollars, so they won’t reduce your taxable income as traditional IRAs and 401(k)s do. But withdrawals you make after age 59.5 will be tax free as long as you’ve had the account open for at least five years.

Thinking of converting your traditional IRA to a Roth IRA? There are several reasons this might make sense. While you’ll have to pay income tax on the converted amount, a Roth IRA allows your money to grow tax-free and then be withdrawn in retirement without income taxes. That’s especially appealing to retirement savers who think they’ll pay a higher income tax rate in retirement than they do now. And if you make too much money to contribute directly to a Roth IRA, a conversion allows you to sidestep those income limits

Think your tax bracket will be higher in retirement than it is now? You definitely want to consider a Roth IRA. That way, you can pay lower taxes on the contributions you make now and you’ll dodge a higher tax bill in retirement.

There are some serious benefits to converting to a Roth IRA. The main benefit is that your withdrawals are tax-free. If you already have a 401(k) or a taxable investment account, you’re going to face some taxes in retirement. Converting to a Roth IRA can give you a tax-free retirement income source to balance out those other accounts.

Another reason Roth IRA conversion is popular is that you don’t have to take Required Minimum Distributions (RMDs). Traditional IRAs have IRS-mandated RMDs that kick in when you reach age 72 (70 1/2 if you reach 70 1/2 before January 1, 2020). Roth IRAs, however, can grow and grow with no withdrawals necessary. This helps you manage your tax liability, and it means that if you want to let your Roth IRA grow as a source of tax-free income for your heirs, you can do so.

For high-income individuals, converting to a Roth IRA gives you the tax benefits you otherwise wouldn’t be able to access due to income caps on Roth IRAs. There are no income limits on a Roth IRA conversion but there are income limits on a direct Roth IRA contribution. It’s a loophole that lets high-income Americans diversify their tax burden in retirement and build a tax-advantaged asset to pass on to their heirs.