Saving for retirement is important. Depending on how much you earn and what percentage of it you put way, the amount of digits in your IRA or Roth IRA can vary greatly. And every time there’s a concern about tax rates changing, the potential value (or potential loss) from IRA conversions can range from thousands to millions of dollars.
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You also might see converting to a Roth as a way to manage the required minimum distributions of a traditional IRA.
So should you convert your IRA to a Roth? There are many factors you should consider when making the decision.
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What Is a Conversion?
A conversion occurs when you move your funds and assets from a traditional IRA to a Roth IRA. What’s the difference? Funds in a Roth IRA grow tax-free, as contributions are made after taxes, whereas contributions to a traditional IRA are made pre-tax, so you’ll be taxed upon withdrawal.
“If you convert a traditional IRA to a Roth IRA, or do a Roth in-plan conversion, you have to pay taxes on the amount of deductible, pre-tax income that you convert,” according to SmartAsset. Along with taxes, there are many factors to consider when deciding whether to convert your traditional IRA to a Roth.
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When To Consider a Conversion
The best time to think about converting is when you’re approaching or already in retirement. Converting means you’ll prepay income tax on a portion of your retirement account, making it immune to future taxes. That can lead to savings if the taxes will increase after the change.
According to Keebler & Associates in Green Bay, Wisconsin, two things should be true to make the conversion advantageous: You pay the tax with money from outside the IRA and your future tax bracket won’t be much lower than it is now.
Understanding Your Future Tax Bracket
Before you think “I won’t be working, so my tax bracket will be lower,” understand that’s not necessarily the case. An unconverted IRA’s minimum distribution may keep you in a higher tax bracket than you’d expected in retirement.
There’s also the question of tax cuts. The 2017 Trump-era tax cuts will expire at the end of 2025, and Congress may consider boosting taxes going forward to deal with the budget deficit.
Regardless of who holds office and sets tax policy, Keebler & Associates pointed out that the most logical guess is that rates are more likely to go up than down for most people.
Consider a married couple filing jointly with income between $201,051 and $383,900. Their 24% federal tax rate now looks nice compared with the 28% or 33% they could see in 2026. For this couple, converting just enough of their IRA in 2024 and again in 2025 to stay at this tax rate would make sense.
Wait and See Approach
You might also wait until the end of 2025, just before the tax cuts expire, to see if Congress passes any additional tax legislation.
If not, you could convert a portion of your IRA to a Roth at the low tax rates still in effect. A few months later, you’d file federal and state taxes on this sum using the 2025 rates, which likely would be lower than 2026 rates due to the tax cuts ending. Moreover, the state tax amount would be deductible on your 2026 federal tax return.
Who Shouldn’t Convert?
Rob Williams, the managing director, financial planning, retirement income and wealth management at Charles Schwab, pointed out that converting isn’t for everyone. For example, those receiving Social Security or Medicare benefits could lose out from a conversion. They’d have more taxable income and, therefore, would pay additional tax on Social Security benefits. Plus, they’d see an increase in Medicare costs.
Williams also said that converting is a bad idea if you have to sell some of the assets in the IRA to cover the conversion cost, because you’ll likely erase the benefits of converting.
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This article originally appeared on GOBankingRates.com: Should I Convert My IRA to a Roth? Here’s What Experts Say
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