Pros and Cons of a Roth IRA Rollover

Deciding to convert to a Roth IRA can have serious tax consequences.

A young woman holding a pen, doing her taxes image by Christopher Meder from

A Roth IRA strips away the popular tax deduction for contributions to traditional IRAs and instead offers tax-free withdrawals in retirement. Otherwise, the two types of accounts are quite similar. You can convert a traditional individual retirement account to a Roth IRA as long as your adjusted gross income is below $100,000, as of 2012. A Roth conversion may be the right move, depending on your financial situation.

Current Taxation

The biggest negative to any Roth conversion is that the full amount of the transfer is considered ordinary income. As a result, you'll pay taxes immediately on the entire balance of your IRA. If you have a sizable IRA, this can prove to be a substantial tax hit. A large Roth conversion may even bump you up to a higher tax bracket, costing you even more. For example, if you are married filing jointly and in the 25 percent bracket, a large Roth conversion might push you to the top 35 percent bracket.

Future Tax Rates

Unless you have a high-paying pension or a lot of investments working for you in retirement, your income will generally be higher while you are still pulling down a paycheck. As a result, your tax bracket in retirement is often lower than your tax bracket while you are still working. In this common scenario, converting to a Roth IRA might be detrimental, since you will be paying tax on the conversion at a higher tax rate than you would have if you simply pulled the money out of your traditional IRA in retirement. However, if you think you are in a period of low taxes and that brackets will rise in the future, converting to a Roth may make more sense.

Growth of Account

The younger you are, the more time your IRA has to grow in value. If you convert to a Roth while you are still young, your account may be worth much more by the time you retire. This can be a huge benefit, as you'll only pay tax on the relatively smaller amount when you convert, rather than the larger balance you'll have accumulated by retirement.

Contributions and Distributions

With a traditional IRA, you cannot make contributions past age 70 1/2. In fact, you must begin taking annual distributions after this age. A benefit of converting to a Roth IRA is that you can continue making contributions your entire life. Additionally, there are no mandatory distributions from a Roth IRA. If you live a long life, you may be able to enjoy an extra decade or more of tax-free contributions and distributions by converting to a Roth.