To convert or not to convert…that is the question.

One of the most frequently asked questions from both clients and prospects alike is: “Should I convert some or all of my Traditional IRA dollars to a Roth IRA?”. While there are plenty of financial professionals who will suggest that one should ‘always’ convert to a Roth IRA to take advantage of tax-free withdrawals at retirement, and still others who suggest the opposite, i.e. to avoid paying the taxes until retirement, the truth is that, as with most financial decisions, there is no one-size-fits-all answer to the conversion quandary. However, the basics behind this decision are really fairly straightforward, and come down to one simple question, “Will I be in a higher or lower tax bracket when I eventually withdraw funds from my retirement accounts?”.

If you believe you will be in a higher tax bracket when you withdraw funds from your retirement accounts, then converting to a Roth IRA (and paying the resulting taxes at lower current rates) makes the most sense.

If you believe you will be in a lower tax bracket when you withdraw funds from your retirement accounts, then keeping the money in a Traditional IRA (and paying the resulting taxes at lower future rates) is the best strategy.

If you end up in the same tax bracket as you are now when you withdraw funds from your retirement accounts, then it makes no difference at all.

For all the debate about where future tax rates might be heading, the reality is that no one knows for sure. As a result, if, like most people, you do not know whether you will be in a higher or lower tax bracket in the future, your best bet, as usual, is to diversify.  In other words, convert some to a Roth IRA and leave some in the Traditional IRA. This is quite simply tax diversification, which gives one the flexibility to take advantage of whatever tax structure is in effect in the future, and, as in most financial endeavors, diversification is decidedly a good thing.

One final consideration is that to maximize the effectiveness of the Roth IRA conversion, funds to pay the current tax liability caused by the conversion really need to come from non-IRA sources. If the funds used to pay the taxes come from inside the IRA account, the loss of the compounding effect that tax deferral has on those dollars over time, will likely render the conversion ineffective.

The question of whether to convert to a Roth IRA certainly comes down to individual circumstances, but to convert or not to convert…the answer is most often ‘yes and no’.


This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Traditional IRA account owners should consider the tax ramifications , age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation. IRAs may not be suitable for all investors. Investing involves risks including the potential loss of principal. Distributions made prior to age 59 1/2 may be subject to a federal income tax penalty. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. limitations and restrictions may apply. Withdrawals prior to age 59 1/2 may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.