Are you a candidate for converting your traditional IRA(s) or other qualified assets to a Roth IRA? If you’re like most investors, your answer isn’t a simple ‘yes’ or ‘no.’

Roth IRAs offer the possibility of tax-free retirement income if managed properly. They also generally have fewer restrictions on distributions and withdrawals. Because of this, you may find they offer more flexibility than a traditional IRA as you plan for your retirement income needs.

Before making a change, you should consider the upsides of a conversion as well as the downsides, which include tax implications. Any pre-tax money you convert to a Roth IRA is treated as ordinary income and taxed at applicable federal and state income tax rates. Anyone is eligible to make a transfer, and, under current tax law, the highest federal tax rate on ordinary income is 39.6%. Taxes aren’t due until you file your return in April of the year after you do your conversion.

The following questions, answers, and table include some other things to consider before making a decision. Please note that this information is for general purposes only. You should consult an accountant to see if converting qualified assets to a Roth IRA makes sense for you.

Things to consider.

  • Do you have money set aside for the taxes you’ll have to pay when you convert? If you don’t have other assets to pay for the income tax owed on a conversion, you may be able to use some of the converted assets to pay your taxes. However, you’ll be subject to an additional 10% penalty if you’re under the age of 59½.
  • Would you be better off investing that money? If you have ‘extra’ money set aside to pay taxes on a conversion, consider what else you could be doing with that money, such as investing. If you use that money now to pay taxes, you’ll be giving up the opportunity to invest and potentially grow your money. Does the benefit of fewer restrictions on future withdrawals outweigh the investment growth potential?
  • Will the asset conversion affect your existing tax benefits? The extra income from a Roth IRA conversion may move you into a higher tax bracket. Depending on your situation, this could disqualify you from other tax benefits such as the dependent child or college tuition tax credits.
  • Are you too old for a conversion? There are no age restrictions to meet in order to convert your money, but timing makes a difference. If you expect to withdraw money from your Roth IRA in the near future, you may not have much time left for your assets to grow on a tax-free basis. You should also consider your current tax bracket: Will you be paying at a higher rate now than you would if you waited until retirement to pay?
  • Is it safe to assume that withdrawals from Roth IRAs will always be tax-free? No one can say for sure. If you believe there’s a chance the federal government will someday impose a tax on Roth IRA withdrawals, would you still find a benefit in this type of arrangement?

Comparing traditional and Roth IRAs.

Traditional IRA

Roth IRA

Who can make contributions? Wage-earners under age 70½ at end of calendar year. Wage-earners of any age with restrictions based on tax-filing status and annual modified adjusted gross income AGI.
Are contributions deductible? Yes, but with restrictions based on tax-filing status, annual modified AGI, and access to a workplace retirement plan. No.
Annual contribution limit $5,500 ($6,500 if 50 or older); limited to lesser of earned income or contribution limit. Same as traditional IRA.
Offers tax-free compounded income? No. Yes.
Taxes on withdrawals of contributions and earnings Withdrawals are taxed; tax liability based on deductibility of original contributions. Withdrawals of contributions aren’t taxed; earnings generally are taxed if taken before age 59½ and if they don’t meet the five-year holding period requirement.
Early withdrawal penalty 10% on most withdrawals before age 59½. Withdrawals of contributions are not penalized; 10% penalty on withdrawal of earnings 1.) before age 59½ or 2.) not meeting tax-year holding period requirements.
Required minimum distributions (RMDs) at age 70½ Yes. No; exceptions possible upon death of account owner.

Like most aspects of personal finance, there isn’t a one-size-fits-all answer to whether or not you should convert your traditional IRA to a Roth IRA. Consider your unique situation, understand the tax implications, and think about talking with a financial advisor. Taking these steps can help you decide if and when a conversion is a good move for you.