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IRA: Should I convert my traditional IRA into a Roth?

Question: Should I convert my IRA to a Roth IRA?

Answer: Roth IRAs are very attractive because once money is inside a Roth, it may never be taxed again. However, before you rush to convert your traditional IRA to a Roth, there are a number of factors you should consider.

  • How much after-tax money will you end up with for retirement? You’ll need to make some assumptions about your future tax rate, your retirement age, and your investment return. Then you’ll have to run the numbers to see whether you’d end up with more money, after taxes, if you left it in your traditional IRA or if you converted to a Roth.
  • Do you have enough cash to pay conversion taxes? When you convert, you'll owe regular income taxes on the amount you roll over to your Roth. If you have to sell outside investments to pay taxes on the rollover, you’ll owe taxes on any gains from those sales as well. If you have to cash out part of your IRA to pay taxes, you’ll be socked with a 10% penalty unless you are over 59½.
  • How soon will you need the money? Generally, you cannot withdraw the earnings on the money within five years of the conversion without a penalty.
  • Will the conversion income push your adjusted gross income to the point where it will cost you valuable tax benefits, such as certain deductions and tax credits?
  • Will it push you into a higher tax bracket?

As you can see, deciding whether a Roth conversion is right for you involves careful planning.