To Convert or Not to Convert: Evaluating the Pros & Cons of Roth Conversions

When considering a Roth conversion, it is important to understand this basic concept: a Roth conversion is simply pulling forward a future tax obligation. In order to withdraw funds from a traditional IRA or other tax-deferred vehicle, someone, somewhere, at some point is going to have to pay taxes. Either you, your spouse, your children, or some other beneficiary will ultimately be taxed on distributions made from a tax-deferred account. A Roth conversion removes the tax guessing game and provides a clear answer to the question: “Who will be responsible for paying taxes on future distributions from my IRA, and when will those taxes come due?”

The answer: You and Now!

All else being equal, a Roth conversion makes the most sense when your current marginal tax rate is lower than your expected future tax rate. This sounds like a simple enough assessment in theory, but is quite challenging to ascertain in practice. You may think you have a reasonable estimate of your future earned income, but no one knows what the Congress may have in store for future taxpayers, or any other twists and turns that life might throw in along the way, for that matter.

To add to the confusion, a Roth conversion has implications beyond one’s own lifespan. In mostcases, a non-spouse beneficiary who inherits a traditional or Roth IRA will have ten years from theoriginal owner’s date of death to withdraw all funds from the inherited IRA. While a Roth conversionmight make sense for an IRA owner in a lower tax bracket than their beneficiary, the opposite mightbe true when the beneficiary is in a lower tax bracket. This is because the higher-taxed IRA ownerwill have a larger tax bill in the year of the conversion than the lower-taxed beneficiary would overthe 10-year period.

All else being equal, conversions make the most sense:

  • During lower earning years, to avoid converted amounts being taxed at a higher marginal rate
  • When the owner’s tax rate is lower than the beneficiary’s tax rate;
  • During down markets, as a larger percentage of an IRA can be converted with the same tax consequence.

A few considerations to discuss with your trusted advisor:

  • A Roth IRA must be open for at least five years in order to benefit from tax-free distributions.
  • Converted funds must remain in the Roth IRA for at least five years before distributions are tax-free. Each conversion has its own anniversary date.
  • If you are under age 59½, taxes will need to be paid using outside funds. In the eyes of the IRS, withholding funds from a conversion to pay for the tax liability is considered a distribution and subject to an additional 10% early withdrawal penalty.
  • Roth conversions increase your adjusted gross income, which may increase Medicare Part B premiums depending on when the conversion takes place.

Given the unique nature of each individual’s circumstances, working with your trusted advisor to access the pros and cons of a Roth conversion is a great way to determine whether if a Roth conversion is right for you. We invite you to connect with the team at Bradley, Foster & Sargent, Inc. if you would like help evaluating your options.

S. Tucker Childs

Tucker is the director of wealth planning and a portfolio manager. He is responsible for providing in-depth insights into wealth planning and investment management. He provides tailored advice to clients, helping them confidently navigate life’s planned and unplanned events.

Before joining the firm, Tucker was the trust operation director at Clayton Bank and Trust in Knoxville, TN serving wealthy families in east Tennessee. He is a Chartered Financial Analyst® and a Certified Financial Planner™.


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