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Ask the Expert: The pros and cons of Roth IRA conversions

I know if I "convert" money from my traditional IRA to a Roth IRA, I’ll owe income taxes on the amount I convert. But all my traditional IRA withdrawals are taxable; and I think taxes will be higher in future. A Roth IRA sounds better. It grows tax-free and withdrawals are also tax-free after you’re 59½ and have owned the account for five years. What else should I consider?

This isn’t a one-size-fits-all decision. Whether it makes sense depends on your wealth, health, life expectancy and future investment returns.

A Roth conversion won’t pay off if you must tap the new account at a faster rate than it’s growing. In other words, the payoff depends on: 1) the Roth’s future investment earnings, and 2) how long you can afford to let it grow untouched.

Let's say you convert $100,000, taxable at 30%. You pay the $30,000 tax from nonretirement funds, so you can deposit $100,000 in the Roth. If the market stays flat or falls, it may take years just to recoup your original $130,000 even if you’re not taking money out of the account. If you must take withdrawals in a flat or falling market, you may never recoup.

That’s why a Roth conversion makes more sense if you intend the new account for your future heirs than for yourself. Under new rules, your adult children will have to empty an inherited IRA — a traditional IRA or a Roth IRA — no later than 10 years after your death. The difference is that their withdrawals from a traditional IRA will be taxable; their withdrawals from a Roth IRA will be tax-free.

The bottom line

Consult your tax accountant or financial planner about your individual situation before deciding whether to do a Roth conversion.

More information

TO ASK THE EXPERT Send questions to Include your name, address and phone numbers. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own consultants for your specific needs.

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