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IRA Rollover Help: Should I Rollover from a Traditional IRA to a Roth IRA?

Updated on February 8, 2010
[pennsylvaniatrustsandestates.com]
[pennsylvaniatrustsandestates.com]

When to convert to a Roth IRA

While neither form of retirement plan is always superior to the other, many investors are realizing significant financial benefits from rolling over their traditional IRA savings into a Roth account.

Here’s how to know what would be the most advantageous choice for you to make.

Your current situation:

  • If you plan to keep working past the day you turn 70½ (or whatever the age is when you retire), you may want to consider a Roth IRA, which does not require you to take require minimum distribution payouts after turning 70. If you can afford to not withdraw from this account, your Roth IRA money will be allowed to grow for an even longer amount of time.
  • If your estate will be subject to estate tax (currently, over $3,500,000) upon your death, Roth IRAs will decrease your estate tax liability, because the amount in the account will be smaller due to the money being in the form of after-tax dollars. If you had a traditional IRA, the untaxed money would be counted as part of your estate, and then taxed again by the estate tax.
  • If you’ve made non-deductible payments to your retirement account, you can avoid some taxation by rolling them into a Roth IRA account. The way this works is that the amount over and beyond the deductible contribution amount will not be taxed. This method will result in a portion of the rollover amount not being taxed, and also allowed to grow tax-free.
  • If your IRA plan imposes a penalty for early withdrawal, it will rarely be beneficial to rollover into a Roth account. The fee will likely cancel out any potential tax savings. The same goes for using money from your IRA to fund the taxes you have to pay on the funds before you deposit them into your Roth account. The tax savings is rarely worth the extra effort and money involved.
  • If you’re in an upper-middle class and higher income tax bracket, you’ll probably be better off to stay with a traditional account and pay lower income taxes on the withdrawals when you retire. On the other hand, if you have a decade or longer until your planned retirement, consider how high income tax levels may be in the future. In some cases, it make sense to avoid the risk by paying moderate level taxes now via a Roth IRA and circumvent extremely high levels in the distant future.
  • If you’re in a large amount of debt, and/or considering filing for bankruptcy, Roth IRA accounts are usually not as well-insulated from creditors as are traditional retirement accounts. To an even greater extent, employer-sponsored retirement plans are almost completely protected from debt settlements, so rolling over to a Roth IRA would increase your risk of losing some of your investment significantly.

Notes on IRAs

For both types of individual retirement accounts, these plans should be viewed as long-term investments, only accessible in extreme emergencies, not as a savings account or for implementing day trading strategies. You will quickly negate any advantages of either IRA if you withdraw too much or too early from your account, and your long-term retirement funds will suffer for it.

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    • gyangroup profile image

      gyangroup 

      8 years ago

      Great Article!

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