Here at Sampson Investment Management, we are often asked about the pros and cons of converting your traditional IRA to a Roth IRA. The IRA to Roth IRA conversion is an excellent estate planning vehicle and is an effective way to pass money to heirs for those who do not need the money for a long time or who may never need the funds.
According to Ed Slott, a nationally recognized expert on IRAs, there are three considerations in every Roth conversion evaluation:
- First, it is important to know when the money is needed. If funds are not needed for at least a 10 to 15 year period, then a conversion may be appropriate.
- The second consideration in a Roth conversion evaluation is to assess what future tax rates might be. If future rates are likely to be higher than current rates, this too is a compelling reason to consider a conversion.
- Finally, it is important to determine where the money will come from to pay the taxes for the conversion. Slott suggests that such taxes should be paid from non-IRA funds.
Persons that should not convert their conventional IRA to a Roth are seniors who will need their IRA funds during retirement, those that believe that they will be in a lower tax bracket in retirement, or those who just can’t bring themselves to pay the tax on the conversion.
Clearly there are many considerations when deciding whether to convert all or a portion of your IRA to a Roth IRA, but in the right circumstances it can be a wonderful planning tool, both for retirement as well as for providing for future generations.