As we approach the end of another new tax year, it’s time again to determine if a Roth conversion makes sense for you.

Keep in mind that even though there are solid long-term advantages to a Roth conversion, there are short-term tax consequences. That means a Roth conversion may not make sense for everyone.

But if you can handle those immediate tax consequences, converting your traditional IRA to a Roth is a no-brainer.

What is a Roth account?

We generally know the basic rules of a traditional IRA. You make contributions that provide immediate tax benefits. Your contributions reduce your income and the money is not taxed until you begin withdrawals. But when you begin withdrawals that money counts as ordinary income, increasing your taxable income and possibly pushing you into a higher tax bracket.

With a Roth IRA there is no immediate tax advantage. Your savings go into the account after taxes. But the money grows tax free, and the withdrawals are tax-free.

Should I convert my traditional IRA to a Roth?

Yes, says Tax Daniel Razvi, Senior Partner and Chief Operating Officer at Higher Ground Financial in Frederick County, Maryland. “As a tax attorney, one of my biggest concerns right now for my senior clients, especially for seniors that have a decent amount of money in IRAs and 401(k)s – then they’re going to be taxed,” he says. “And whether you’ve reached the age for required distributions or not, you have to pay tax on that on the government schedule. So, getting ahead of that and converting it to Roth is a really, really good idea, especially because the Trump tax cuts are expiring in two years.”

“…we only have this year and next year to do Roth conversions at the old rates.”

“That means for most people, the tax rates are going up in two years,” he says. “And not only that, but the (tax) brackets are also shrinking in two years. So, you have a high likelihood of being in a higher bracket, or maybe two brackets up in a couple of years. That means we only have this year and next year to do Roth conversions at the old rates.”

When is the best time to convert?

The prime time to (convert) is when an individual does not have a ton of earned income,” says Zac Ungerott, Senior Wealth Advisor at Hightower Wealth Advisors in St. Louis, Mo. “So ideally it’s best for somebody who has just retired, for example, and they no longer have income.”

Roth Conversion may not be for everyone

Not everyone has the cash to pay the taxes for a Roth conversion. It may not make financial sense to take out extra funds to pay the taxes. For example, if you convert a $100,000 IRA you must pay the taxes of 10% to 37% of that amount, depending on your tax bracket. That will increase further if you include state taxes.

Typically, to see if it makes sense or not, look at your tax rate, Ungerott says. “Do you think your tax rate is going to be higher or lower in the future? If you think it’s going to be higher in the future, than a Roth conversion typically could make sense. If you think your tax rate is going to lower in the future, than a Roth conversion may not make sense.”

In addition, if you use money from the IRA to pay those taxes, you are, in effect, reducing the amount of your long-term retirement savings.

“It (also) might be tough for people who are not making as much as their monthly expenses are, if they’re already pulling money from their IRA to live on, or they’re pulling money from other assets to live on,” says Eric Bond, wealth advisor with Bond Wealth Management in Long Beach, California.  “Because then you’re going to be taking away from the principal.”

Since we know that taxes are set to increase, “it just makes sense for a lot of people to convert,” says Bond. “We can’t say it for all (people), because it doesn’t make sense for everybody. But if your focus is to pass more wealth on to the kids, that the Roth conversion makes sense.”

YOUR TURN

Have you done a Roth conversion? What was your experience?  Let us know in the comments!

Rodney A. Brooks is an award-winning journalist and author. The former Deputy Managing Editor/Money at USA TODAY, his retirement columns appear in U.S. News & World Report and Senior Planet.com. He has also written for National Geographic, The Washington Post and USA TODAY and has testified before the U.S. Senate Special Committee on Aging. His book, “The Rise & Fall of the Freedman’s Bank, And Its Lasting Socio-economic Impact on Black America” was released in 2024. He is also author of the book “Fixing the Racial Wealth Gap.” His website is www.rodneyabrooks.com

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