Should I convert to a Roth IRA?

The Roth IRA offers a number of advantages over its traditional counterpart. These include:

• Tax-free distributions at retirement
• Ability to continue making contributions beyond age 70-1/2
• No required minimum distributions beginning in the year you turn 70-1/2
• Leaving assets to survivors that are free from income taxes

However, conversions from a traditional IRA to a Roth IRA are subject to income tax since the original contributions were initially made with pre-tax dollars. Also, your modified adjusted gross income (MAGI) must not exceed $100,000 for you to be eligible for a Roth IRA conversion. If you believe that future tax rates will be higher than today, then you should consider a Roth conversion. There are no limits on the size of a conversion.

Assets converted to a Roth IRA must remain in the account for at least five years before any distributions are taken. Otherwise, a significant tax penalty may apply.

You'll maximize the potential for tax-free income later if you pay conversion taxes out of pocket, rather than withdrawal them from your IRA. If you can't pay conversion taxes without using part of your IRA funds, you probably shouldn't convert unless you are certain you will be in a high tax bracket during retirement.