Roth IRA conversions: Pros & cons (2024)

You might have heard someone talking about a Roth IRA conversion this time of year and wondered what it’s all about: What is a Roth IRA conversion, and should you consider converting your traditional IRA (or another qualified retirement plan) to a Roth?

Of course, everyone’s situation is different, and your best bet is to talk to your financial advisor before making any big decisions. But this guide can outline a few of the pros and cons of Roth IRA conversion to help you get the conversation started.

Here are some good reasons to consider converting your IRA, and a few reasons not to.

A Roth IRA conversion involves taking a tax-deferred retirement savings account, such as a traditional IRA or 401(k), and moving that money into a Roth IRA, an account that won’t be taxed again after you pay taxes on the amount you convert.^1,2,3 Earnings can be withdrawn tax-free, but only if you are at least 59½ and have had the Roth IRA for five years or more.

• Have questions about the different types of IRAs? Explore our IRA guide.

Roth IRA conversions have several advantages: portfolio diversification, alleviating concerns of future tax rates, keeping your current tax bracket, and having no required minimum distributions (RMDs).

One way to have a diverse investment portfolio is to vary the times when you will be required to pay taxes on your investments, so you’re paying some taxes now and some taxes later.

For example, traditional IRAs and employer-sponsored retirement accounts, such as 401(k) or 403(b), allow you to defer the taxes on any money you contribute for many years until you begin making withdrawals, at which point you are taxed on earnings as well.

Strategically converting tax-deferred accounts to a Roth IRA can help you diversify your holdings by reducing or even eliminating your eventual tax bill on those investments.

Because you’re paying taxes now when you convert to a Roth IRA, you don’t have to predict what the tax rates will be in the future. While American taxpayers currently pay some of the lowest marginal tax rates since the federal income tax was instituted in 1913, there’s no way to know what tax rates will be during your retirement.

Furthermore, tax reductions resulting from the Tax Cuts and Jobs Act of 2017 are set to expire at the end of 2025 unless Congress extends them.

If you expect your income—and thus your tax bracket—to rise, completing a Roth conversion may be a good idea.

Depending on your age and current tax laws, money you have converted to a Roth IRA could benefit from decades of potential growth before you begin withdrawals—and you won’t be taxed on those earnings.¹

• Learn more about working tax efficiency into your financial strategy.

While you must begin taking withdrawals from a traditional IRA between the ages of 72 and 75 depending on when you were born, there are no required minimum distributions (RMDs) with Roth IRAs during your lifetime. You can leave the money there as long as you like, growing tax free. And, if you have had the account for at least five years, your beneficiary will receive proceeds tax free.

4.8.53 Can you have multiple HSAs?

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Roth conversions also have potential drawbacks including withdrawal rules and raising your taxable income for the year.

While you can begin taking distributions from your Roth IRA at any time, any earnings you withdraw are considered ‘qualified'—or tax free and penalty free—if the account is at least five years old and you are older than 59½, disabled, buying your first home or you inherited the Roth IRA.^1,2,3

If you convert and are under 59½, there is a separate five-year rule on your conversion dollars in order to avoid the 10% penalty. This five-year rule applies separately for each Roth conversion. If you withdraw your conversion dollars (the earlier of) five years or a penalty exception applying, then the IRS will assess a 10% penalty on those dollars.

A Roth IRA conversion may not make sense for you if you are in your peak earning years. Recall that when you convert money to a Roth IRA, your taxable income for that year increases, which could bump you into a higher tax bracket. Therefore, you may want to wait to complete the conversion until a year when your taxable income is not as high.

Consider meeting with a financial advisor. They can help you determine when or if a Roth IRA conversion is right for you and create a plan for strategically using your assets in tax-efficient ways.