Roth IRA Rollover

When considering whether to do a traditional IRA rollover or take your retirement savings and do a Roth IRA rollover instead, there are several factors you should take into account.

The first is the fact that traditional IRA funds are in pre-tax dollars while Roth IRA funds are in post-tax dollars. What that means is that a rollover from a traditional IRA to a Roth IRA will trigger a taxable event during the year of the rollover where you’ll have to pay taxes at your current income tax rate on the accumulated balance and growth in your IRA account.

However, after the conversion, your retirement savings will then grow tax free in the Roth account so, assuming you have the funds to account for the taxes, it may be a good idea to pay the taxes on the smaller balance now to avoid taxes on future growth.

In addition, withdrawal requirements for a Roth IRA are eased. Minimum distributions must begin on a 401k at 59 1/2, on a traditional IRA at 70 1/2, but there’s no minimum distribution or age limit on a Roth IRA. This gives your balance more time to compound than these other pre-tax accounts.

In estate calculations, the entire value of your IRA is counted when computing taxes even though a large portion of a traditional IRA will be paid out in taxes upon liquidation. With a Roth, your heirs are not, in effect, taxed twice when your estate is settled.

The tax consequences of a Roth IRA rollover from a traditional IRA can become complicated so be sure to consult a tax professional before making a final decision. But, in the long term, it often makes sense to pay taxes on the rollover now to avoid paying more in taxes at retirement.