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Should You Consider A Roth Conversion?

March 24, 2021

As most of us probably know, there are two types of IRAs: Traditional and Roth. You may even understand that there are tax differences between the two, and it’s possible you have both of these savings vehicles in your retirement toolbox. But what you may not know is that your traditional IRA can be converted to a Roth IRA. If you’re drawn to the benefits of a Roth and think that it would be more favorable for your financial situation, here’s what you need to know about a Roth conversion.

 IRAs 101

Before you can evaluate whether a conversion is in your benefit, you need to understand what sets these two types of savings accounts apart. Here’s a short primer for you: Traditional IRAs allow you to save on taxes now and pay them at a later date when your income is traditionally lower. Roth IRAs are funded with after-tax money, and withdrawals in retirement are tax-free.

 Aside from the primary tax difference between the two, Roths have income restrictions whereas traditional IRAs don’t. In 2020, a single person making above $124,000 cannot contribute to a Roth. For a married couple filing jointly, the limit is $196,000. (1)


Why Should You Convert Your IRA?

There are many reasons why you may want to consider a Roth conversion. For one, there are no income limitations when you convert. If you are not eligible for a Roth initially, you can pay the taxes to convert your Traditional IRA to a Roth and still reap the benefits. In addition to tax-free growth, Roth IRAs are great because they don’t require you to start taking distributions when you’re 72 like all the other retirement plans out there. In fact, instead of taking money out, you can keep putting money in. Also, they have favorable rules for your heirs, so your account can keep growing tax-free for years after you are gone.

 Also, when you convert your IRA, you pay taxes now so that you don’t have to when you make withdrawals in the future. Roths also have more flexible withdrawal rules, which is an attractive feature to many. Finally, if you have a substantial IRA, you can reduce the amount of your Required Minimum Distributions (RMDs) by converting a portion of it to a Roth, keeping you in a lower tax bracket when it comes time to start taking withdrawals. This can be a big deal when calculating how much of your Social Security is taxed too.

 So the big question is, when should you convert your IRA? Is there an ideal time to pay the taxes and make the change?


When Should I Convert My IRA?

There are many scenarios to consider when deciding when you should convert your IRA. The most important factor to consider is your current tax bracket. If you find yourself in a lower tax bracket due to unemployment, medical expenses, business loss, or significant tax credits, it would be worth it to convert now. If you expect your income and tax rate to increase in the years to come, now would be the ideal time to make the change.

Make sure you have the resources available to pay those extra taxes on the withdrawal. If the only extra money you have is from the IRA account itself, you are cheating yourself out of the chance for those funds to grow and compound tax-free in the Roth.

Remember that the amount withdrawn from the Traditional IRA counts toward your annual income, so know your numbers and don’t let the conversion push you into a higher tax bracket for the year.

How It Works

The basic process to convert your IRA: withdraw the amount you’d like to invest in a Roth, pay the tax owed on the distribution, then reinvest it into a Roth account.

 Keep in mind that there are many complex factors involved in the conversion process.

If you are already taking RMDs, you must take it first and then convert the remainder. Conversions are not an all-or-nothing decision and have no minimum amount requirement, so you can convert as little or as much of your IRA as you’d like.


Is A Roth Conversion Right For You?

A Roth conversion is an advantageous way for high-income earners and traditional IRA account earners to access the benefits of a Roth IRA and possibly lower their tax burden over the long haul. However, because of the many tax implications, you need to be careful. It’s important to work with an experienced financial professional to ensure you are making the most of your investments and not paying more taxes than necessary.

Here at Pathway Financial Planning, Inc., we can help you determine if a Roth conversion is a good fit for you and work towards proper implementation. Call our office at 765-698-5121, or email us at to set up an appointment to get started!


About Ben

Ben Harvey is president and senior financial planner at Pathway Financial Planning, Inc., an independent, comprehensive financial planning firm that prioritizes the client, each and every time. Ben spends his days staying on top of what’s going on in his clients lives, coordinating the financial planning process, helping people identify their goals, and evaluating whether they are on track. He designs and implements customized strategies all as part of the proprietary process, The Path to Purpose FORMula™. Ben has 15 years of experience in the financial industry, including years as a loan officer, trust officer, and financial advisor, and provides a unique skill set of business management, retail lending, estate and trust administration and planning, comprehensive financial planning, and wealth management.

Outside of work, Ben enjoys spending time with his wife, Mandy, and their children, Cooper and Claire. They are active in their church, and especially love traveling, hosting friends and family, going to amateur sporting events (especially high school basketball and swimming), and experiencing different cultures. On occasion, you can find Ben playing golf, sometimes in amateur tournaments, which he credits for teaching him patience. He will also tackle the occasional home improvement project, read non-fiction, and watch documentaries. Through experience and “honey-do lists,” Ben has learned to never start a project he’s not ready to finish. To learn more about Ben, connect with him on LinkedIn. You can also register for his recent webinar, Retire with Purpose: An Easy Strategy to Simplify Your Distributions.