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To Convert to a Roth IRA or Not: That Is the Question

Written by Dan Solin on May 18, 2010 in Retirement  |   4 comments

The income constraints are gone: now anyone can convert a pre-tax IRA or 401(k) plan assets into a tax-free Roth IRA. All you have to do is pay ordinary federal and state income taxes on your pre-tax IRA, and you’ll have created a fund from…

Roth IRA conversion things to considerThe income constraints are gone: now anyone can convert a pre-tax IRA or 401(k) plan assets into a tax-free Roth IRA.

All you have to do is pay ordinary federal and state income taxes on your pre-tax IRA, and you’ll have created a fund from which no taxes will ever be due.

So should you take the bait? Maybe yes and maybe no. Here’s a look at both sides of the issue:

Reasons to Convert Your IRA or 401(k) to a Roth IRA

1. You’re young.Younger investors who anticipate being in a higher tax bracket in the future should consider paying the tax now at their lower marginal tax rate and converting the funds to a Roth IRA. Since the Roth IRA is tax-free (and not just tax-deferred), your money will grow tax-free forever, and you avoid giving Uncle Sam a bigger share of the funds you withdraw from your IRA.

2. You have good retirement cash flow. Older investors who won’t need to take distributions starting at age 70 ½ might be better off in a Roth IRA. With a traditional IRA, you’re required to take minimum annual distributions at age 70 ½ that will trigger the payment of taxes on those distributions.

3. You’re doing estate planning. If you don’t anticipate needing your IRA funds during your lifetime, a conversion to a Roth IRA, which you then leave to your heirs, can be a way to ensure fond memories. The tax-free withdrawals can be prolonged over the lives of your heirs, turning a small gift into a huge inheritance.

4. You’re single. If you were filing jointly with your spouse and are now single (through divorce or death of a spouse), conversion might make sense. Married couples get more favorable tax rates. As a single filer, you could benefit from taking distributions tax-free.

Reasons Not to Convert Your IRA or 401(k) to a Roth IRA

1. You’re headed for a lower tax bracket.Older investors who are in a high tax bracket now but anticipate being in a lower one in the near future shouldn’t convert to a Roth IRA. When considering your future tax bracket, don’t forget state taxes. Many retirees move from higher tax states to those with no state income tax (like Florida). Be sure to take both your federal and state taxes into consideration when contemplating an IRA conversion.

2. You’re planning to pay the tax bill with your IRA funds. If you’ll be paying the taxes owed when converting a traditional IRA with IRA funds, you might be better off not converting. This is especially true if you’ll incur penalties in addition to taxes by converting to a Roth IRA. If you can use non-IRA funds, a conversion could make sense.

3. You’re planning to leave your money to charity. If you’re an older investor who intends to leave your IRA to a charity, you should not convert your IRA funds to a Roth IRA. Check with your estate lawyer, but you will probably be better off excluding the larger pre-tax IRA from your taxable estate. The charity won’t care. It doesn’t pay any income tax.

4. You’re worried about asset protection. If this is a concern, converting your 401(k) to a Roth IRA may give you less protection. Investors who are in high-risk professions (like physicians) or who are being hounded by creditors should have their lawyers check the state laws where they reside to determine if their assets are more vulnerable in a Roth IRA than in a 401(k).

The conversion decision is not uncomplicated. Investors should seek the advice of their accountants or tax advisers before making the leap to a tax-free Roth IRA.

Have you decided to take the conversion plunge? What tipped the scales for you?


Dan Solin is a best-selling author, a wealth advisor with Buckingham, and the director of investor advocacy for the BAM Alliance.

The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.


  1. Eva Rosenberg, EA says:

    Hi Dan,

    I'm glad you're tackling this and look forward to what people have to say about this touchy topic.

    One other reason to convert to a Roth is your IRA has declined dramatically in value, to less than you contributed to the IRA. If you cash out all your IRAs, you might be able to take a Miscellaneous Itemized Deduction for the loss of your contributions. No guarantees. Check with your tax pro.

    A reason not to bother converting?
    You really don't have any investments that are going to go up dramatically in value anyway. And you don't have the time, expertise or contacts to handle the account for you. If it's just plodding along at 1% or 2%, why bother paying taxes now? You're not going to earn any more when you move it to a Roth either.

    Best wishes,


    Your TaxMama

  2. George says:

    Question: Lots of positive talk and spilled ink about Roth conversions, but can't find anyone addressing the following scenario: my traditional IRA is still 20-30% underwater from the 2008 crash. How does it make sense for me to convert to a Roth, thereby actually realizing the huge loss? Am I missing something here? Great show Ilyce – thanks much!

  3. Eva Rosenberg, EA says:

    Actually George,

    Go talk to your tax pro – or consult Dan! If you cash out all your IRAs you just might be able to write off the loss as a Miscellaneous Deduction on Schedule A.

    To IRS, a loss means that you cash out less than you put in. Not that your IRA is worth less now than it did two years ago.

    As a result, you get your money now. Pay tax on the distribution. Get a deduction for the loss. Roll it DIRECTLY into a Roth IRA. And invest it in something stable. For the long-term, not the roller-coaster ride. (If you can find something.)

    Read more of Dan's tips for ideas.

  4. George says:

    Good advice – thanks Eva!

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