When Should You Convert to a Roth IRA?

Here’s what you need to know about IRA’s:

A traditional IRA allows you to invest pre-tax money today, but requires you pay taxes when you withdraw the money in the future (like a 401k).

A Roth IRA means you are investing after-tax dollars today, but do not have to pay taxes when you withdraw the money in retirement.

According to James A. Daniel, CFP®, You should consider a Roth IRA conversion if:

  • You expect your tax rate to be higher when you retire
  • You have enough time to let your investments grow before you withdraw any money
  • You have enough money to pay any taxes due when you convert
  • You want to leave the money to heirs

You should avoid a Roth IRA conversion if:

  • You expect your tax rate to be lower in retirement
  • You have to use cash from the IRA to pay the taxes due when you convert
  • You are already retired and the conversion increases your current income tax rate
  • You have a child applying for financial aid at school
  • You plan to use the money in your IRA for healthcare costs

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