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Should You Convert to a Roth Before You Retire?

Filed under: Retirement

Since its creation in 1974, the individual retirement account (IRA) has become one of the country’s most popular retirement savings vehicles.1 There are more than 25 million IRAs in the United States, and they have an aggregate balance of nearly $2.5 trillion.2

The traditional IRA was the original version founded in 1974. In recent years, however, the Roth IRA has grown in popularity. Many savers prefer the Roth’s tax treatment, as well as its ability to generate tax-free income in retirement.

Not everyone can contribute to a Roth IRA, though. The Roth has income limitations that prevent you from contributing if your annual income exceeds a certain level. For example, in 2016 you can’t contribute to a Roth IRA if you are a single person who makes more than $132,000 or a married couple who earns more than $194,000.3

Due to the income limits and other reasons, many savers have accumulated much of their retirement assets in a traditional IRA instead of a Roth. If you fall into that group, you can still take advantage of the Roth’s unique tax treatment by doing something called a Roth conversion. That’s the process of transitioning a traditional IRA into a Roth IRA.

Is a Roth conversion right for you? Possibly, but it depends on your unique needs and objectives. Below are three questions to ask yourself before you move forward with a conversion:


Are you concerned about taxes in retirement?

One of the biggest reasons why people execute Roth conversions is to take advantage of the account’s unique tax treatment. In a traditional IRA, your contributions may be deductible and your investments grow on a tax-deferred basis. However, all distributions from the account are treated as taxable income.

A Roth is a little different. You don’t get any deductions for your contributions, but your investments still grow on a tax-deferred basis. As long as your distribution is qualified, however, it’s tax-free. That means you can convert your traditional IRA into a Roth and potentially generate a stream of income in retirement without increasing your taxes. If you’re concerned about taxes in retirement, a Roth conversion may be a good strategy.


Do you want to defer distributions as long as possible?

You may be in the fortunate position of not needing distributions from your IRA. Perhaps your goal is to leave your IRA to your children or other loved ones. That could be an issue with a traditional IRA.

In a traditional IRA, you have to take required minimum distributions starting at age 70½. In a Roth IRA, there are no required distributions. That means you can keep your funds in your Roth IRA and allow them to grow in a tax-advantaged way as long as you want. There’s nothing saying you ever have to take a distribution from your Roth IRA.


Do you have the funds to pay current taxes for your traditional IRA?

When you execute a conversion, you are essentially transferring your money from a traditional IRA to a Roth. To do that, however, you have to satisfy the rules of your traditional IRA. Remember, in a traditional IRA you pay income taxes on your distributions.

As a result of the conversion, you will have to pay taxes on the amount of money that comes out of the traditional IRA. It’s possible to withhold those taxes from the converted amount. However, it may be preferable to pay the taxes from other sources.

You may want to maximize the amount of money you put into the new Roth IRA to take advantage of the tax treatment. If you pay your taxes out of the IRA money, that action will reduce the amount of money that is converted into the Roth. If you have other resources to pay the taxes, you may get a better outcome from the conversion process.

Wondering whether you should consider a Roth conversion? It’s a complicated decision with a number of factors. It may be helpful for you to consult with a financial professional. Contact us at Ambrose Financial & Insurance Services in Walnut Creek, California. We’re happy to help you analyze your needs and goals and determine the right course of action for you.






This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

CA Insurance License No. 0F95178

16068 – 2016/8/31