Converting to a Roth IRA

In most cases, I would rather maximize a contribution to a traditional IRA than invest a smaller amount in a Roth IRA. For that reason, and also because I like to take my tax breaks now rather than later, my own personal IRA is currently totally a traditional IRA. I'm expecting, though, that I may have a future opportunity to have the best of both worlds by converting my traditional IRA into a Roth IRA.

Converting to a Roth IRA

The ramifications of converting a traditional IRA into a Roth IRA are complex and different for each individual. There are a couple of constants, however. First, we know that taxes on the amount converted will be due immediately. If those taxes must be paid from the amount withdrawn from the traditional IRA, it is almost impossible to make a case for conversion unless there is a lengthy time between conversion and retirement to make up the taxes paid.

However, if assets are available from other sources to pay the tax bill, a conversion makes much more sense. Conversion is even more attractive if tax rates in retirement are the same or higher than current rates. While it may seem unlikely that your tax rate will be higher in retirement than while you are working, inheritances could boost the size of your investment portfolio substantially. Also, let's not forget, politicians who insist on growing the government instead of the economy have a way of increasing tax rates whenever possible.