Why Should I Consider a ROTH Conversion?

Richard St. John |

Each year there is the opportunity to convert some or all of your IRA account assets to a ROTH account. The purpose in doing so is to eliminate the Federal and State tax on any future distribution amounts and enable you to withdraw funds earlier without penalty. Funds including gains held in ROTH account can be distributed tax-free subject to some manageable restrictions.

The trade-off however, is that in the year of conversion there is a one- time tax on the amount being transferred from your IRA to your ROTH account. By paying the tax out of the IRA account you end up with less principle, but reinvested over a number of years the amount paid up front should be less than the amount that you would pay at a later date.

The key to maximizing the benefits of this conversion is to either do it annually in small pieces so as not increase your tax rate on the incremental amount and pay the tax out of taxable funds rather than depleting some of the tax-free funds; or consider doing a measured amount of IRA to ROTH conversion in any year in which you have lower taxable income than the previous year.     

A financial advisor should be able to help you evaluate your situation to help you determine if it would tax-effective for you to complete such a conversion and at what amount. Remember, the ROTH account needs to be set up and funds converted by December 31st.

  • By Richard St. John, Founder & President