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Converting a traditional IRA to a Roth IRA provides an excellent opportunity to build additional financial resources for your retirement years. In many cases, a person who uses the Roth to invest with post-tax dollars is better prepared for retirement than the individual who does not.

If qualified, deducting your traditional IRA contribution allows for an immediate tax benefit. Contributions to traditional IRAs are tax-deferred and are later taxed at whatever the individual’s income tax bracket is at the time of withdrawal. (A 10% penalty may apply if these withdrawals are made before the age of 59 1/2.) Roth IRA contributions, however, are paid with after-tax dollars and will never be taxed again — provided the investor follows specified government regulations. All profits earned inside a Roth IRA accrue tax-free for retirement.

Some benefits from converting from a traditional IRA to a Roth IRA are:

  • No mandatory distributions. Investors are not required to take withdrawals from their Roth IRA at 70 ½ as with traditional IRAs.
  • No tax on gains when withdrawn
  • Investment prices

If you think your investments are currently undervalued, then purchasing them in a Roth IRA enables you to avoid paying tax on the gain.

A Roth IRA conversion may be done with all or a portion of your account. Upon converting, you will be responsible for paying taxes on the traditional IRA. It is advantageous to pay these taxes through a different account. This is due to the fact that if you pay the taxes out of an IRA and are less than 59 1/2 years of age, you will owe at least a 10% early withdrawal penalty on that amount and could be subject to additional income tax.

Professional advice should always be sought before converting to a Roth IRA. Before a decision is made, think carefully about your current and expected retirement tax bracket, age and expected returns. In most cases, the higher you expect your returns to be, the more attractive the Roth option looks. Remember to ask your financial advisor or CPA to discuss with you the different factors that should be taken into account when making this important decision.

When Can you Convert 401k to ROTH IRA | Converting IRA to ROTH IRA Rules
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