Should you convert to a Roth IRA?
There can be tax advantages to converting a Traditional IRA into a Roth IRA. A Roth IRA allows you to make tax- and penalty-free withdrawals of any original contributions you made at any time. When you are 59½ or older, distributions of earnings from a Roth IRA are also tax free as long as a contribution was made at least 5 years ago.
Things you might want to consider
The cost of paying back the taxes
Depending on how much you have in your Traditional IRA, the amount you would be taxed on a conversion could be substantial. While you may elect to pay these taxes using funds from your IRA, this may reduce the benefit of making a conversion because you are reducing the retirement plan balance and therefore limiting its future growth.
It may not be a good choice to convert a Traditional IRA to a Roth IRA the closer you are to retirement. You'll have less time to make up for what you lose when you pay taxes at the time of the conversion.
Your current tax benefits
The income you report from the conversion could push you into a higher tax bracket. This could exclude you from other tax benefits, such as child and higher education tax credits.
Your income after retirement
If you are in a lower tax bracket when you retire than you are in now, the taxes you pay on your distributions will be less at that point than the rate you would pay on a conversion today. By waiting, you could let the money compound in your regular IRA and pay taxes at your lower rate in retirement.
Your plans to leave an inheritance
A Roth IRA doesn’t require minimum withdrawals during the life of the IRA owner, so the full amount may be passed to the beneficiary. With a Traditional IRA, you usually have to start taking distributions from your account when you turn 70½. Unnecessary distributions could mean less money for your heirs.
We recommend you talk to a tax professional for advice about your specific situation before you decide to convert to a Roth IRA.