Roth IRAs have wonderful benefits: tax free growth and tax free distributions. So, when you have the opportunity to convert assets from a traditional IRA to a Roth IRA, should you make the conversion?
Here are some considerations that will help you to decide:
- Zero tax bracket: If a full conversion or partial conversion can be offset by deductible losses (i.e. business losses, mortgage interest, student loan interest), the conversion makes sense because it is free. No additional tax dollars will be assessed and you are converting assets that will be distributed with taxes due into assets that will be distributed without any taxes due. Converting after tax traditional IRA assets would also be available at no cost.
- Higher future taxes: Paying taxes today may make sense if you think income tax rates or, at least your personal income tax rate, will rise in the future. You are also eliminating taxes on all future growth.
- No RMD: If you won’t need the required minimum distributions from your traditional IRA, it may make sense to convert to a Roth IRA to take advantage of continuous tax free growth and tax free distributions for future generations. Unlike the traditional IRA, the Roth IRA does not have required distributions.
- Asset protection: IRA and Roth IRA assets are protected from bankruptcy proceedings and lawsuits (i.e. malpractice claims.) Assets outside the IRA can be used to pay the taxes on the conversion, thereby reducing non-protected assets and maintaining asset protected assets.
- Diversification: Because the tax code is ever changing, it may be wise to divide your assets between non-retirement investments, traditional IRAs, and Roth IRAs.
If you have questions about retirement planning, traditional IRAs, Roth IRAs, and Roth conversion, be sure to consult with a qualified estate planning attorney.