Skip Navigation Download Adobe Acrobat Reader 5.0 or higher to view PDFs.
Man looking out a brightly lit window

Financial Learning Center


IRAs (Individual Retirement Accounts)

Roth IRA Conversions

Contributions to a Roth IRA are still subject to income limitations, but since 2010 a Traditional IRA can be converted to a Roth IRA without income limitations. Income taxes on the deductible contributions and any earnings in the account at the time of the conversion have to be paid. Penalties for early withdrawal from Traditional IRA are waived for the purposes of a conversion.

SUGGESTION: You can also convert holdings from prior employer 401(k)s and other workplace savings directly into a Roth. Just ask your financial professional for assistance.

IMPORTANT NOTE: Converting a traditional IRA into a Roth IRA has tax implications. An investor should carefully consider the source of funds used to pay the taxes owed on a Roth conversion. Penalties and taxes may apply if the investor uses money from the IRA as the source for conversion taxes. Consult a tax professional for details.

For those older than 70 ½ years, because of the mandatory withdrawals associated with Traditional IRAs, you cannot convert those particular funds to a Roth. However, after you take your minimum distribution, you can convert the remaining IRA assets to a Roth to avoid that problem in coming years.

Head-to-head: Roth Versus Traditional Ira

Now that we've examined how the Traditional IRA and the Roth IRA works, we can now look at the two side-by-side and compare the advantages and disadvantages to figure out which is best for you.

You should know at the outset that on paper, neither retirement vehicle has an inherent financial advantage over the other. That is, if you contribute the same amounts to both over the same period, invest in the same investments, and pay taxes according to the same tax bracket, the amount available for withdrawal will be the same in the end.

But if you are able to contribute the maximum allowed to your Roth, then the tax-free gains on investment give the Roth the advantage over the Traditional. In addition, we all know that the tax code and your tax brackets both will change over time. The challenge, therefore, is to pay the tax bill at the most opportune moment. In general, if you anticipate your taxes will be higher in the future, you should pay the Tax Man now with the Roth. If not, you should lean toward the Traditional.

There are some nuances, however, that might change your thinking about which one is more advantageous in your unique situation:

  • Unlike with a Traditional IRA account, The Roth has no mandatory withdrawals after age 70 ½ to push your income (and your tax bill) higher.
  • For the most part, withdrawals from a Roth IRA are tax-free as long as you observe the 5-year-rule.
  • Your heirs won't owe income tax on withdrawals from a Roth IRA. This has led some to view Roth conversions as an alternative to life insurance.

Traditional IRA

Roth IRA

Maximum annual contribution = $6,000 in 2019, $7,000 for those reaching age 50 by December 31, 2019.

Maximum annual contribution = $6,000 in 2019, $7,000 for those reaching age 50 by December 31, 2019.

If neither you nor your spouse is covered by a pension plan, the IRA contribution is fully deductible. If you or your spouse is covered by a pension plan, the IRA contribution deduction may be limited or completely phased-out.

Contributions are not deductible.

Anyone can establish a traditional IRA.

In order to establish a Roth IRA, your 2019 modified adjusted gross income, if filing a joint return, cannot exceed $203,000 ($199,000 in 2018) and $137,000 ($135,000 in 2018) for singles.

Contributions and earnings grow tax-deferred until withdrawal.

Contributions and earnings grow tax-free and withdrawals are tax-free, provided the IRA is held for at least five years and withdrawals begin after age 59½ or are due to death or disability, or for "first-time home buyers" subject to a $10,000 limit.

Contributions are not allowed after age 70½.

Contributions are allowed after age 70½, provided you have earned income.

Withdrawals must begin at age 70½.

Withdrawals do not have to begin at age 70½.

Penalty-free withdrawals can be made for a qualifying first-time home purchase, subject to a $10,000 lifetime limit.

Provided the IRA is held for at least five years, penalty-free, tax-free withdrawals can be made for a qualified first-time home purchase, subject to a $10,000 lifetime limit.

Penalty-free withdrawals can be made for higher education expenses of the taxpayer, spouse, children, or grandchildren.

Penalty-free withdrawals can be made for higher education expenses of the taxpayer, spouse, children, or grandchildren.

You make the call

To convert or not convert is a risky decision because we can't know now what our tax rates will be in the future. But this decision is not all-or-nothing. You can convert part of your Traditional to a Roth for diversification purposes, and you can undo your conversion if you change your mind as long as you do it in the same tax year. Your financial professional can help you make the calculations and walk you through the process.

If you are tempted to convert but don't have the funds available now to pay the associated taxes, you might want to think carefully. You should not dip into your IRA to pay the tax bill. This defeats the purpose of the conversion by chipping away value of the very nest egg you are attempting to nurture. You should only seriously consider the conversion if you can finance the resulting tax bill from a source other than your IRA.

Here are other factors to keep in mind:

  • The amount of time until you will begin taking withdrawals from the IRA
  • The number of years you plan to take withdrawals from the IRA
  • The rate of return you expect to earn before retirement
  • The rate of return you expect to earn during retirement
  • Your current income tax bracket
  • Your income tax bracket in retirement
  • The amount of tax you will be required to pay if you make the conversion

 

The longer the period until withdrawal, and the higher your expected rate of return, the more advantageous it may be to convert. The greater the amount of earnings in the account, the greater the tax-free advantage upon distribution. If you are close to retirement, it may not be as beneficial to convert. Keep in mind that the larger the IRA account balance you have to convert, the more tax you will have to pay.

Share Article:
Add to GooglePlus

Investment and insurance products and services are offered through INFINEX INVESTMENTS, INC. Member FINRA (Opens in a new Window)/SIPC (Opens in a new Window).  UniVest Financial Services is a trade name of UniBank. Infinex and UniBank are not affiliated. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of, nor guaranteed or insured by, any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.


BrokerCheck