This post is the second in a series of three. Use these links to go to the other posts:
- Basics of Roth Conversions
- Taking Distributions from Roth Accounts Containing Converted Funds
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What is it that determines whether converting to a Roth is a financially good decision? That’s the $64,000 question, and in this case, that amount could literally be the value at stake with this decision. Roth conversion calculators abound on the internet, but before you use them, it might help if you understand the significance of the information you’ll be asked to provide. And, there are some factors the calculators probably won’t take into consideration – but you should, if they affect you.
You can download and print a version of this chart that has columns for you to mark which factors apply to you, and to note whether the calculator(s) you’re using ask for that information.
| Factor | How it affects a Roth conversion | Favors: |
| Non-deductible contributions make up a significant proportion of the balances in your non-Roth IRA accounts. | You will owe no tax on that proportion of the converted amount. | Conversion |
| You are under age 59 ½, and you will have to use money from your IRA to pay the tax on the conversion. | You’ll be hit with a 10% penalty on that amount, in addition to regular income tax unless you qualify for an exception. | Traditional IRA |
| Your estate is large enough that you expect to owe estate tax. | Taxes you pay now will be removed from your estate, reducing the amount of estate tax owed. | Conversion |
| The beneficiary who will inherit the IRA upon your death is in a much lower tax bracket than you. | If you convert, you’ll pay more taxes than your heir would. | Traditional IRA |
| You don’t need the money in your IRAs to live on, and you’d rather leave it all to your heirs. | A Roth IRA (or, as of 2024 a Designated Roth Account) does not have required minimum distributions for the account owner. | Conversion |
| You can pay the tax on the conversion without using any of the money from the IRAs you are converting. | You’ll owe tax but no penalties, and gain tax-free earnings on a greater amount of money than in your Traditional IRA. It’s as if you contributed additional money to your IRAs. | Conversion |
| Your income this year (or the next 2 or more years) is much lower than it will be in future years. Perhaps you’ve retired but are not yet collecting Social Security or taking distributions from retirement accounts. Or you only worked part of this year. | The tax rate on the conversion may be lower than the rate you’ll owe if you wait. RMDs will be larger if you’ve taken no voluntary distributions prior to age 73. | Conversion |
| You plan to leave your IRAs to a charitable organization. | Charities pay no income tax, and your estate won’t pay estate tax on amounts left to charitable organizations. Note: You will have to take minimum distributions beginning at age 73. The longer you live, the smaller the balance you’ll be leaving to charity and the smaller this advantage will be. | Traditional IRA. |
| You plan to take substantial Qualified Charitable Distributions (QCDs) from your IRA. | QCDs from your IRA are tax-free. If you plan to distribute much of your account balance this way, there is no need to do a conversion and pay tax. | Traditional IRA |
| Your heir has a high income and is in a higher tax bracket than you. | This doesn’t impact your personal finances, but it does affect family wealth: a traditional IRA leaves the income tax burden to the heirs. | Conversion |
| You are receiving Social Security benefits and have Medicare. | The additional income from a conversion may cause you to pay tax on 50 to 85% of your Social Security benefits, and it could increase your Medicare premiums significantly. | Traditional IRA. |
| Without the conversion, your income is very close to the top income for your current tax bracket, or to the threshold for other taxes such as the Net Investment Income tax. | You would only owe the higher rate on the additional money, above the cap for your existing tax bracket. Moving from the 10% to the 12% bracket, or from the 22% to the 24% isn’t a big deal. But if you’ll move from the 12% to the 22%, or from the 24% to the 32%, could be a significant amount of money on a large conversion. | Traditional IRA |
| You will be applying for financial aid for college for yourself, your spouse, or a child next year. | Income from a conversion could reduce the amount of financial aid, whereas balances in retirement accounts are not considered in the federal financial aid formula. | Traditional |
| You have a family member in college, and your income is within the limits for tax breaks such as the American Opportunity Tax Credit or Student Loan Interest income adjustment. | The additional income from the conversion may cause you to lose these tax breaks. | Traditional |
As you can see, this decision can be very complex. You may want or need professional advice. Check the Finding Financial Advice that’s Right for You page on this website for resources to help you choose a financial planner or tax expert.
Still to come: My next post will explain the rules for taking distributions from a Roth account that contains converted funds.
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Adapted from a Plan Well, Retire Well blog post I first wrote in 2010 for University of Illinois Extension. Used with permission.
Karen Chan Financial Education & Consulting, LLC 
[…] convert money from a tax-deferred account to a Roth has even more factors to consider. See my post, Converting to a Roth IRA: Factors to Consider, for a discussion of […]