2 Questions to Ask Yourself Before Executing a Roth Conversion

If you’re like many workers, you use an individual retirement account (IRA) as a retirement savings vehicle. There are more than 25 million IRAs in the United States, and they hold an aggregate balance of more than $2.4 trillion. The average balance is $119,804, but the top 12 percent of accounts have balances of greater than $250,000.1

While a traditional IRA can be a very effective tool for accumulating retirement assets, it also presents some interesting challenges. With a traditional IRA, you may be able to take advantage of deductions for your current-year contributions, depending on your income. Your investments in the IRA also grow on a tax-deferred basis.

However, your distributions from the IRA in retirement are taxed as income. That means if your tax rate is higher in retirement than it is today, the distribution taxes could negate the benefit you received from the deductions.

Some investors are addressing this risk by using a strategy known as a Roth conversion. It’s the process of transitioning a traditional IRA into a Roth IRA. A Roth IRA differs from a traditional in how it is taxed. With a Roth there is no upfront deduction, but distributions after age 59½ are considered tax-free.

By executing a Roth conversion, you can take a taxable income stream and turn it into a tax-free source of retirement income. Of course, there are some important considerations to analyze before executing a conversion. Below are two important questions to ask yourself:


Do you have five years or more before you need retirement income?

One of the key benefits of the Roth—tax-free income—is dependent on the distributions meeting special “qualification” standards. For the distribution to be considered “qualified,” you must be either over age 59½, disabled or dead. The Roth also has to have been in force for at least five years.

That means, to take advantage of the tax-free income, you must execute the conversion at least five years before you need to take a distribution. If you need the income immediately or within a couple of years, a conversion may not be a good strategy for you.


Do you have the resources to pay the taxes on a traditional IRA?

Another important consideration is whether you have the ability to pay the tax obligation on your traditional IRA. Remember, distributions from a traditional IRA are taxable as income. If you take the distribution before age 59½, you may also face a 10 percent early distribution penalty.

If you complete the conversion within 60 days of taking the initial distribution, you won’t have to pay the penalty. However, you will still have to pay taxes on your deductible contributions and your growth from the traditional IRA.

While you can withhold the taxes from the converted funds, that may not be the wisest strategy. Remember, to maximize the benefits of the Roth, you’ll want to fund it with as much money as possible. If you pay the taxes with the IRA funds, you’ll have less money going into the Roth.

Ideally, you can pay the tax bill with other assets, such as a bank account or some other non-qualified investment. That way, all of your traditional IRA funds will go directly into the Roth IRA.

Curious about whether a Roth IRA is the right strategy for you? Contact us. We are happy to analyze your objectives and challenges and help you determine whether a Roth conversion is right for you. Let’s connect soon and start the conversation.


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.

16079 – 2016/8/31

Reality Check: It Might Be Time to Revisit Your Retirement Income Plan

Funding your retirement today has changed dramatically from planning a retirement income a few decades ago. Today’s economic circumstances have created a new reality that requires a different approach.
Download Now