When You Shouldn't Convert to a Roth IRA (2024)

FAQs

When You Shouldn't Convert to a Roth IRA? ›

Money that you'll need soon isn't a good candidate for conversion because your assets may not have time to recoup the taxes you would have to pay. You're currently receiving Social Security or Medicare benefits.

Since a Roth conversion increases taxable income in the conversion year, drawbacks can include a higher tax bracket, more taxes on Social Security benefits, higher Medicare premiums, and lower college financial aid.

If you're now in one of the higher tax brackets, your tax rate in retirement may have nowhere to go but down. In this case, you're probably better off postponing the tax hit by contributing to a traditional retirement account.

You can convert any amount of money from a traditional IRA at almost any time. Neither your age (62) nor your IRA balances ($950,000) would restrict your eligibility for a Roth conversion. It is not too late to make this conversion. The only age-related restriction relates to required minimum distributions (RMDs).

Assuming your Roth IRA can grow at a 6% rate of return, it will take you a minimum of 10 years to break even.

You Might Pay More in Taxes in the Long Run

Converting from a traditional IRA to a Roth can make sense if income tax rates (yours personally, or the whole country's) go up in the future. But if you're likely to be in a lower tax bracket later, as many people are after they retire, then you would do better to wait.

While there's no way to avoid conversion taxes completely, you can restructure them to make this much more manageable. By staggering out your conversion or timing it for years in which you have low tax liability or portfolio losses, you can reduce the impact of a Roth IRA conversion.

The Roth IRA five-year rule says you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to a Roth IRA account. This five-year rule applies to everyone who contributes to a Roth IRA, whether they're 59 ½ or 105 years old.

For taxpayers who anticipate a higher tax rate post-retirement, converting a regular IRA to a Roth IRA after age 60 can help to lower their total tax burden over time. Roth IRA conversions allow earnings to grow tax-free and avoid the need to make required withdrawals that increase post-retirement tax costs.

Then when you're retired, defined as older than 59 ½, your distributions are tax-free. They are also tax-free if you're disabled or in certain circ*mstances if you're buying your first home. In contrast, for a traditional IRA, you'll typically pay tax on withdrawals as if they were ordinary income.

Should I do a Roth conversion at age 65? ›

The short answer is no – there are no legal restrictions to Roth conversion based on age or income. Practically, however, the decision involves carefully weighing tax implications, healthcare costs, estate planning and more. Spreading conversions over multiple years often makes the most financial sense for larger IRAs.

Roth IRA - Conversion From an IRA Distribution Must be by End of Tax Year. The original conversion from a Traditional IRA to a Roth IRA must be completed within 60 days after the end of the tax year.

A Roth conversion can be a great idea, but it can also increase Medicare premiums substantially. Because Medicare premiums are tied to income it is important to be able to run scenarios on converting to a Roth IRA.

Inevitably, you may wish to undo a conversion, perhaps due to poor investment performance. For tax years before 2018, you had until October 15th of the year after making a conversion to reverse it and avoid the related tax liability. Beginning with the 2018 tax year, undoing Roth conversions are no longer permitted.

For taxpayers who anticipate a higher tax rate post-retirement, converting a regular IRA to a Roth IRA after age 60 can help to lower their total tax burden over time. Roth IRA conversions allow earnings to grow tax-free and avoid the need to make required withdrawals that increase post-retirement tax costs.