Three Questions to Ask Before Converting to a Roth IRA

Your current tax bracket should be a major factor in deciding whether to convert to a Roth IRA. If your bracket is high, a conversion may not be the best move.

For example, if you are a high earner in the 32% bracket, every $1 you convert to a Roth IRA would create $0.32 in taxes. A $100,000 conversion could therefore leave you with a $32,000 tax bill, making it a less attractive choice.

What tax bracket do I expect in retirement?

Before making a Roth conversion, it is important to look beyond your current tax situation and think about where you may stand later on.

If you believe you will be in a lower bracket in retirement than you are now, a Roth conversion may not produce the payoff you expect. Using the same example, converting at 32% now but ending up in the 24% bracket later would mean paying the IRS more than necessary on that money.

That calculation is not entirely straightforward, though, because other benefits matter too, such as tax-free retirement income. Withdrawals that are not taxed could help reduce Medicare premiums and may even keep some of your Social Security benefits from being taxed.

Even so, comparing your present bracket with your future one is still a key step. Some retirees may actually land in a higher bracket because of the savings they have built up. A lower bracket in retirement is not guaranteed, so it is worth considering your own financial picture carefully.

How much do I plan to give to charity?

If charitable giving will be a major part of your retirement strategy, a Roth conversion may not be the most efficient option. Qualified charitable distributions let you send money directly to charities while avoiding taxes and meeting required minimum distribution rules.

A Roth conversion may offer little benefit if most of the money is going to charity anyway. In that case, you would be paying taxes now instead of preserving the chance to distribute the funds later without increasing your tax burden.

Roth conversions can be useful in the right situation, but it is important to be sure the strategy fits your goals before making the move.