When Should I Convert From a Traditional to a Roth?

If you own a traditional IRA then chances are you’ve considered converting it to a Roth IRA. At the very least, you’ve heard about this option and wondered if it’s right for you. Both types of IRAs are good. A traditional IRA is a way great to save pretax income. Traditional IRAs offer tax-deferred growth, which means you will owe tax on the money when you do finally cash it out.But you don’t pay tax on it when you initially earn it.

With a Roth IRA, you contribute money you’ve already earned and paid taxes on. However, you don’t have to pay taxes on the money again when you cash it out. Likewise, you earn interest on that money tax-free.

So both types of IRAs can be beneficial. It just depends on your specific situation as to which one is best. If you are considering converting your traditional IRA into a Roth, when is the best time to do it? The answer will depend on the specifics of your personal circumstances. However, here are a few guidelines to keep in mind.

Consider Your Tax Bracket

First off, converting your IRA while you’re in a lower tax bracket is generally a good idea. If you’re fairly sure you will be in a higher tax bracket by the time you reach the age of 70½ and beyond then converting before that makes sense. That’s because when you reach 70½ you have to start taking required minimum withdrawals(RMDs), which will be taxed as regular income. The same is true if your beneficiaries would be in a higher tax bracket. Either way, it simply makes more sense to pay the lower tax rate now when you convert, instead of the higher tax rate later.

On the other hand, if you think you will actually drop into a lower tax bracket down the road, then converting doesn’t make much sense. Keep it in a traditional holding and your tax amount will be smaller when you withdraw. If you aren’t planning to spend the money but instead leave it to your heirs, then you must consider which tax bracket they will be in down the road compared to where they are now.

Required Minimum Distribution

Back to that required minimum distribution mentioned earlier. Many people with traditional IRAs worry about the minimum distribution that kicks in at age 70½. However, this is usually not enough of a reason to convert. The RMDs won’t always kick you into a higher tax bracket. A lot depends on how much you have in your IRA.

In the first year, the RMD is only about 3.7 percent of the total IRA. By the time you reach 80 years of age it rises to about 5 percent. That means the amount you have to withdraw might not be large enough to push you into a high bracket. If it’s not, then you might want to stick with your traditional IRA.

Speak With a Professional

Ultimately, there are many factors to take into account when considering converting or not. If you aren’t sure which method is right for you, or when is best to convert, it’s a good idea to consult with a qualified financial advisor or tax expert.