Under some circumstances, converting a traditional IRA to a Roth IRA might be a smart retirement planning strategy. A Roth conversion refers to taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA.
What are some of the potential benefits of doing this?
Tax-free withdrawals in retirement
When taking withdrawals from a traditional IRA, you have to pay taxes on the money your investments earned and on any contributions you originally deducted on your taxes. With a Roth IRA, as long as you meet certain requirements, all of your withdrawals are tax-free.
Traditional IRAs force you to take required minimum distributions (RMDs) every year after you reach age 70½, regardless of whether you actually need the money. Roth IRAs don’t have RMDs during your lifetime, so the money can stay in the account and continue to grow tax-free.
Tax-free inheritance to your heirs
The people who inherit your Roth IRA will have to take annual RMDs, but they won’t have to pay any federal income tax on their withdrawals as long as the account has been open for at least 5 years.
Deciding whether to convert to a Roth IRA hinges on issues like your tax rate now versus later, the tax bill you’ll have to pay to convert, and your future plans for your estate. It is best to consult with a tax and/or financial advisor before you make your final decision.