A cost comes along with a Roth conversion and you can lose some tax deferral.
Americans have moved more than $75 million, since Congress approved the partial or full IRA conversion to a Roth IRA. However, while it is popular, it doesn't always work out for the best, according to The Wall Street Journal in “When to Ignore the Crowd and Shun a Roth IRA.”
Retirement funds that go into a Roth get tax-free growth and tax-free withdrawals, minus any required payouts based on age, which is a sticking point for IRA owners.
A traditional IRA grows tax free, but withdrawals are taxed as ordinary income. Those pesky Required Minimum Distributions (RMDs) are also a permanent fixture, even if you don't need the money.
However, Roth conversions come at a cost. You'll have to pay a tax to transfer your money from the traditional IRA to the Roth and you may lose valuable tax deferral, without gaining more valuable tax-free benefits.
This is a deadline to bear in mind: after tax year 2018, you won't be allowed to undo a Roth conversion.
What are some further reasons to take a pass on the IRA Roth conversion train?
Your tax rate is probably going down. If your tax rate is going to be lower when you take withdrawals, the transfer will cost more. If you are going to convert, do so in a low tax-rate year when income takes a dive. For instance, if you are in your 20s and have an IRA and return to school, or if you've retired but aren't yet taking IRA RMDs.
The same goes for someone who is about to move to a state where taxes are lower.
Where is the money coming from to pay the tax bill for the conversion? If you don't have the money to pay the tax bill and plan on using money from the IRA to pay it, you're using assets that could otherwise grow tax free.
Converting to an IRA raises your income level for that year. Therefore, benefits that exist at a lower income tax level might lose value as your income takes a leap. Tax breaks for college or other deductions could be lost.
If you make frequent donations to charity, you can use your traditional IRA's RMD to donate to charity. The donation can count toward your required payout, up to $100,000 per year from your IRA. You can't do that with a Roth.
An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include a Roth IRA conversion.
Reference: The Wall Street Journal (Aug. 17, 2018) “When to Ignore the Crowd and Shun a Roth IRA”
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