The Argument Against the Roth Conversion
Roth IRAs offer some great characteristics: Tax-free growth, tax-free access, potential tax-free transfer to heirs, no required minimum distributions, and access for home purchases and higher education expenses. Seems hard to turn down the opportunity if you can afford the tax, right? Everyone should do it, right? The answer’s not that straightforward.
There’s an Alternative Worth Considering
Roth IRAs have two big downsides: (1) you can’t access the money without penalty until you’re 59 and a half or have special circumstances; (2) the income limits for contributing to a Roth remain intact ($120K for single filers, $177K for married couples in 2010); and (3) the amount you’re able to contribute is low ($5K; $6K with catch-up). We get this one-time shot at converting to a Roth, but for many of us, we’ll never be able to contribute another dime to that account.
But what if you could? What if you could put 10 or 20 percent of your income (an amount that might actually get you through retirement) into an account that would grow tax-free, would allow you access the cash tax-free for any reason at all at pretty much any time, would never require you to take a required minimum distribution, and would transfer to your heirs income tax-free? Would you do it? You’d sure like to know about it, right? It exists. It’s out there. It’s likely available to you.
Here’s another issue: If your IRA accounts are a small portion of your overall net worth, it actually might make a lot of sense to leave it alone and let it grow. If it’s one of the few places that you’ll withdraw taxable income in retirement, you may be financially better off leaving it in its Traditional IRA form. Take the tax savings and invest it.