To convert or not to convert…It depends!

Converting to a ROTH IRA means that you would pay the tax now on some or all of your IRA’s in exchange for tax-free growth and withdrawals on that money going forward. While tax-free growth and tax-free income in retirement or tax-free inheritance to beneficiaries is always preferable, there are a couple of things you need to consider first.

Consideration One: What tax rate will you pay to convert?

When converting to a ROTH, the amount you convert will be added to your current year’s taxable income, so depending on how much you convert and how high your other taxable income is, will determine the tax you pay. You can find the 2018 tax tables online to use for a simple calculation. For example, if you are married and your income is $80,000 and you want to convert $100,000 of your IRA’s to a ROTH, you would fall into the 24% tax bracket after taking the standard deduction (not accounting for state taxes). (Please note, this is a simple calculation to give you an idea of what tax rate you would pay upon conversion, it is not intended to be tax advice. Please consult with your tax advisor for more information regarding your personal situation.)

Consideration Two: Will a conversion affect any of my other benefits?

If you have health coverage from the marketplace or Medicare, then a higher tax bracket could affect your premiums not just for the current year, but also the next year.

On the reverse, a lower taxable income in the future could lower or prevent your social security from being taxed in retirement. For a married couple, if your provisional income (half of your social security and all other taxable income) is over $32,000, then 50% of your social security benefits are taxed at your current tax rate. If your provisional income is over $44,000, then 85% of your social security benefits are taxed at your current tax rate. So, converting to an IRA now to create tax-free income later could reduce the percent of your social security benefits that will be taxable.

As with any financial decision, I would recommend you consult with an advisor to see what will be best for you to help you achieve your goals and live your dream retirement. There are other ROTH alternatives that may make more sense for you or it may not make sense to convert at all. It is important to consider all factors and not make any financial decisions in a vacuum.