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Money Minute: Should You Convert your IRA to a Roth IRA?

Money Minute: Should You Convert your IRA to a Roth IRA?

If you have a traditional IRA, you may want to consider the advantages of converting it to a Roth IRA.  The biggest difference between the two IRAs is when your funds will be taxed. With a traditional IRA, no taxes are paid when you contribute to the account, but rather you pay taxes when you take money out. Roth IRAs are the opposite. You pay taxes on the contributions as you make them, but not when the money is taken out (provided you have reached the age of 59 ½ and have had the account for at least 5 years).

  • When you convert your IRA, you will pay any taxes due on the assets today, however all distributions at retirement will be tax-free. And unlike a traditional IRA, there are no mandatory withdrawals for a Roth IRA when you reach age 70 ½.
  • Anyone can convert their eligible IRA assets to a Roth IRA, regardless of income or marital status.
  • Generally, converted assets in the Roth IRA must remain there for at least five years to avoid penalties and taxes.
  • Distributions from a Roth IRA are tax free and penalty free provided the five-year aging requirement has been satisfied and at least one of the following conditions has been met:
    • You reach age 59 ½
    • You pass away or become disabled
    • You make a qualified first-time home purchase
  • A Roth IRA can also be used as an estate planning tool. Upon your death, your account passes to your beneficiaries and they will take the money out of the account tax free. Also, paying the taxes up front reduces your estate tax liability.
  • Another unique feature of a Roth Conversion IRA is that you can change your mind. You have until October 15thof the year following the conversion year to move the assets back to its original IRA status.
You will be paying taxes on the money when you convert to a Roth IRA so you will want to convert at a time when you can afford to pay the taxes with minimal impact on your overall tax situation. Before you convert your traditional IRA to a Roth IRA, please consult your tax advisor or financial planner to see if it’s right for you.

Article Topic Expert: Peter Jelacic

Pete is a Senior Wealth Manager with SVA Plumb Wealth Management, LLC.

With more than 28 years of experience in the financial industry, Pete provides comprehensive financial planning and investment management that helps his clients reach their goals.

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