Should I Convert My IRA To A Roth – 5 Things To Consider Before Doing It

Today, we’re going to talk about five considerations you should make before doing a Roth conversion.
First, what is a Roth conversion?
Simply put, it’s when you decide you want to take money from a pre-tax account – like a traditional IRA or a SEP IRA – and pay taxes on it to convert it to a Roth IRA.
The reason for doing that is that you’re ripping the band-aid off and paying the taxes now versus paying it later. Now, there are a lot of benefits to a Roth IRA, which we talk about in other segments.

Now let’s talk about five things you should consider before doing a Roth conversion.

Roth Consideration # 1: Cost.
When you do a conversion from a traditional IRA to a Roth IRA, you’re going to get that converted amount reported on a 1099 that you get in the following January.

You treat that amount as normal income added to your adjusted gross income, and you pay normal income tax on it.

So, the first question you want to ask yourself is for the amount that I convert: “Can I afford to pay the taxes on that when it comes to tax time?”

Roth Consideration # 2: What do you think your tax bracket will be in the future?
Now, a lot of us don’t have a crystal ball.
It depends on how far you’re trying to look in advance, but some people consider “Well, if I’m making less money now, and I plan to make more money later, I’ll be in a higher tax bracket.”

So oftentimes, depending on your current tax situation, you may want to do a Roth conversion because you’re in a lower income or lower income tax bracket. But, if you’re in a higher income tax bracket that may change things.

Roth Consideration # 3: Recovery period.
This is a big one.
You have to decide where your breakeven point is.
That is, comparing the taxes you paid to convert to the investments now in your Roth IRA, when are you going to see the breakeven point when it comes to your tax-free growth?
This is important when it comes to your investments. Some investments take a short time to hit that recovery period.
If you’re invested in something like a CD, you may never see the recovery period, and so it might not make sense.
However, that’s not because the conversion doesn’t make sense, because it’s the investment that doesn’t make sense.

Visit our website for the other 2 things to consider.

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00:00 – Intro
00:17 – Roth Conversion
00:40 – Cost
01:13 – Tax Bracket
01:44 – Recovery Period
02:28 – What Investment
03:38 – Generational Wealth…(read more)

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