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Reasons to switch now to a Roth

By Jennie L. Phipps ·
Wednesday, December 11, 2013
Posted: 11 am ET

If 2013 wasn't a high-earning year for you, then this might be a good time to convert your traditional IRA to a Roth IRA.

Taxes are the great persuader. If you think you'll find yourself in a lower-than-usual tax bracket for the 2013 tax year, then choosing this year to pay taxes on previously untaxed income could be a smart move.

Money goes into a traditional IRA untaxed. It is taxed when you withdraw it, based on your tax bracket when you make the withdrawal. With a Roth IRA, taxes are paid upfront so you pay no tax when you take a distribution from it. With a traditional IRA, no matter what your tax bracket, when you turn 70 1/2, you must begin to withdraw the money and pay taxes on it. With a Roth, the taxes are all paid, so you don't have to make required minimum distributions, or RMDs.

While there are limits based on income affecting who can contribute upfront to a Roth, anyone, regardless of income, can convert from a traditional IRA to a Roth. While the deadline for new contributions to Roth IRAs is April 15, Roth conversions must be made by Dec. 31, 2013, to be counted for the 2013 tax year.

So why would you want to convert midstream? Dave Littell, retirement income program director at The American College, says he thinks one of the best reasons to convert is peace of mind. "If I can afford to pay the taxes at the current rate, I'm eliminating the uncertainty of what future tax rates will be," he says. "You are paying taxes at the rate that you know."

2 more reasons to convert

Here are other persuasive reasons to switch this year:

  • Lower-than-usual income. "If you are in an artificially low tax bracket, that's a great time to do some converting," says Littell. This might be the case if your income is lower than it had been previously and lower than it is likely to be next year because you've been out of work, have high medical bills or are making a large charitable deduction.
  • You're living on after-tax dollars. If you are waiting to take Social Security so your income from it is higher and in the meantime are relying on savings to pay living expenses, paying taxes on an IRA now -- before Social Security kicks in -- could mean you'll pay less.

Consider getting some expert help with this kind of retirement planning. You don't have to convert your entire traditional IRA. Littell warns that if you do, you may push yourself into a very high tax bracket. He suggests carefully converting only an amount that will keep your tax liability below key thresholds. Figuring out where you stand is vital, and unless you thoroughly understand tax law, you'll probably need help.

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John Alexander
March 12, 2014 at 9:57 am

I still have a few years before retirement. Would it be wise for me to switch from my SRA before tax to a Roth, now? Will I have to wait the five years before withdrawing without penalty?

December 11, 2013 at 6:23 pm


December 11, 2013 at 5:22 pm

I have been thinking of doing this. My question is...I am 63 years old. Does my contributions to the Roth have to stay in there for a period of time before I can make a withdrawl?