Should You Convert? … to a Roth IRA, that is

“To convert, or not to convert. That is the question.” OK, Shakespeare I’m not. But, I have had the question posed to me many times over the years, and sometimes I suggest it even though it wasn’t on a client’s radar.

There are a lot of factors that go into this complex decision, and you need to be aware of what they are. I’ve compiled the pros and cons below from my experience with hundreds of planning cases over the years. You’ll probably choose one more of the yes and no reasons, so the decision is going to have to be based on which aspects are most important to you.

TO CONVERT: Your answer may be YES if one or more of the following is true for you:

  • The amount you convert is more money than you will ever need for your own living expenses.
  • You love your kids and want them to inherit an income tax-free asset.
  • You want to reduce the amount your heirs will have to pay in estate taxes, assuming your estate is large enough for this to be an issue.
  • You have not started taking required distributions (RMDs) yet. In this case, you could start taking distributions before hand that are equal to, or less than, what your RMDs are likely to be.
  • You want to lower your future required distributions.
  • The government doesn’t change the laws on the deferrals in the future. (Time to order that crystal ball.)
  • Your IRA account value dropped significantly.
  • You can live with the pain of paying the taxes now.
  • You have enough cash to pay the taxes outside your retirement accounts.
  • All of your IRA funds are in a non-deductible IRA and the taxable amount would be negligible.

OR, NOT TO CONVERT: The answer may be NO if one or more of the following is true:

  • You plan to spend the money during your lifetime.
  • You already started taking required minimum distributions.
  • You are leaving the converted Roth IRA to charity.
  • You have high income taxes at the time of the conversion.
  • The government eliminates the ability to defer withdrawals past age 70 1/2. (Where’s that crystal ball?)
  • The government eliminates the ability of your heirs to stretch out the distributions. (Oh, crystal ball? Hello?)
  • Your heirs would take all of the money out right away and spend it, which means you took the tax hit for nothing.
  • You will be in a much lower tax bracket in the years after the conversion.
  • You don’t have enough money in cash outside your retirement accounts to pay the taxes.
  • You won’t have enough remaining in cash reserves after the conversion. Robin Hood is just a story. Don’t live it.

If you’d like to see a projection of the impact a potential conversion might have on your cash flow and portfolio before you proceed, give PlanPrep a call at 805-910-9657. We will work with you and your tax advisor to help you make an informed choice.


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