When to Convert a Traditional IRA to a Roth IRA

by Lois Center-Shabazz

Published on this site: August 5th, 2005 - See more articles from this month

I am often asked the question, "Should I invest in a regular IRA or a Roth IRA"? The next most frequent question I get is, "Should I convert to a Roth IRA?" In both situations, it depends on many factors. Here I will address a few of the situations that will help you decide when and if you should convert to a Roth IRA.

Getting up in age, near or about retirement age you may consider converting to a Roth IRA, mainly because you can accumulate more money with a Roth IRA than a regular IRA.

This conversion is for middle to high-middle income earners, for if you have a modified adjusted gross income of more than $100,000 or you are married filing separate you don't qualify for a Roth IRA at all. So don't even consider it.

You can save money in a traditional IRA with both tax deductible and tax free savings. But, you have to pay taxes on the money when you take it out. When you take money out of a Roth IRA you don't have to pay taxes on it. But, it only accumulates tax-free.

If you plan to convert to a Roth IRA make sure you take the money out of your IRA little by little. You have to pay taxes when you take money out, using this strategy you can keep the tax bill down.

You can also convert the same investment you already have from a traditional IRA to a Roth IRA. There is no need to purchase a new investment.

If you have a low to middle income, you will not have a large tax bill, so you can withdraw directly from your traditional IRA when you are 59 1/2 or when you decide to retire after that. You do not need to convert to a Roth IRA. Make sure the withdrawals are small enough to keep your tax bill within reason.

Be careful who you listen to also. Some advisors are not honest and they will steer you into a high cost annuity. Annuities have many hidden cost and it usually takes years (upwards of 20-40), before the investment makes a profit. Many older people are being steered into high cost annuities even though they were meant to be retirement instruments for those who have several years to retire, not those who are in or near retirement.

Before converting, you have to do some arithmetic, and if the conversion is not done correctly, and you are under 59 1/2 you may have to pay a penalty for early withdrawal of your traditional IRA.

Check with your tax accountant before you make a move if you don't understand the arithmetic.