Should you convert retirement savings to a Roth IRA?

Saving in several types of retirement accounts—pre-tax dollars in both a 401(k) or 403(b) and an IRA, post-tax funds in a Roth IRA—can be a good way to diversify your savings. But in some scenarios, you might want to consider moving savings from a traditional IRA into a Roth IRA, known as a Roth conversion. Here’s what you need to know.

What is a Roth IRA conversion?

A Roth IRA conversion is simply taking some or all pre-tax funds from a traditional IRA and moving them into a Roth IRA. You can convert funds before or during retirement. At the time of the Roth conversion, you also pay the taxes that would ordinarily be due. These transactions are sometimes referred to as backdoor IRAs or super Roths (see below for why).

How do you convert retirement savings to a Roth IRA?

A Roth IRA conversion process is similar to any retirement savings rollover. You will have to complete some paperwork and direct where rollover funds go. In addition, you can choose to convert some or all funds from an existing traditional IRA.

What are the advantages of Roth IRA conversion?

There are a few reasons a Roth IRA conversion might fit into an overall retirement savings strategy.

You exceed the income limitations for a Roth IRA. While anyone can open and contribute to a traditional IRA, only people who meet income and contribution limits can open a Roth IRA. That means you can’t take advantage of the post-tax benefits of a Roth IRA—unless you take a “backdoor” path and do a Roth IRA conversion.

You may be in a higher tax bracket in retirement than you are now. Because you already pay the taxes due when you convert an IRA to a Roth IRA, when you finally use the funds in retirement, you won’t receive a tax bill. This may be a consideration if you are planning on moving to a state with higher retirement income taxes.

You want flexibility in the amount you withdraw in retirement. Roth IRAs have no required minimum distributions, or RMDs, so you can take out as little (or as much) as you want.

You want to leave these funds to loved ones as part of an estate plan. Most of the time, a Roth IRA enables your heirs to receive the money and withdraw it without paying taxes. (Check with a tax and estate planner—the specifics may vary based on your heirs’ tax bracket.)

What are the disadvantages of a Roth IRA conversion?

Before a Roth conversion, consider the following.

Do you have the funds to pay the income taxes on whatever you convert to a Roth IRA? A traditional IRA is created with pre-tax dollars; that means you haven’t yet paid income taxes on those funds. So, when you convert from a traditional IRA to a Roth IRA, you have to pay those income taxes. (You would have paid them at some point if you left them in a traditional IRA.) However, once you’ve paid those taxes, the principal and earnings in that converted Roth IRA grow tax-free. In general, try to avoid using the funds you intend to convert to pay those taxes; instead, use other savings. This will help ensure you’re not reducing your retirement savings and avoid a potential distribution penalty.

Are you under age 59½ and need the money in five years? If so, count on a 10% withdrawal penalty on any principal you take before the five-year limit expires.

Do you have upcoming college tuition bills? A Roth IRA conversion could increase your expected financial contribution on the Free Application for Federal Student Aid, or FAFSA, because distributions are reported as income.

Do you want to leave retirement savings to charity? There's no need to pay taxes at all if you're leaving your retirement funds to a charity. So converting to a Roth IRA will only cost you an unnecessary tax bill.

With any decision that impacts so many aspects of your financial future, consider consulting experts, from a financial professional to legal and tax experts.