Should I move my money from a traditional IRA to a Roth IRA?

Whether or not to move your money from a traditional IRA to a Roth IRA is a hot topic in retirement planning these days. This move could potentially benefit your retirement savings, but does it make sense for you? Here’s some background that can help you understand the basics.

1. What’s the difference between a traditional and Roth IRA?

The main difference is when you pay income taxes on the money you put in the plans.
  • With a traditional IRA, you pay taxes when you withdraw the money in retirement.
  • With a Roth IRA, it’s the opposite: you pay taxes on the front end. As long as you are over 59-1/2 and your account is at least five years old, you will not have to pay income taxes on the amount you withdraw.

2. Why would I want to move from a traditional to Roth IRA?

A Roth IRA’s “pay now, save later” model could be a good approach for you.
  • With a Roth IRA, you’re locking in your taxes now (in 2021) when tax brackets are historically low rather than rolling the dice with potentially higher tax rates later.
  • If you plan to leave money to your kids, doing so through a Roth IRA is helpful because income taxes have essentially been pre-paid and your kids won’t be saddled with that expense.

3. Who does a Roth IRA make the most sense for?

It could be especially beneficial if you’re in one of these situations.
  • You’re in a lower tax bracket.
  • You’re bothered by the uncertainty of how tax rates may fluctuate in the future—and you dislike not knowing how much tax you will be required to pay when you retire with traditional IRA.
  • You don’t anticipate needing all your retirement money and are planning to leave some to your kids.

4. What should I keep in mind before converting from a traditional to a Roth IRA?

Here are some things to consider.
  • Your tax bill could be substantial when you make the conversion, and it’s usually best for you to pay the taxes out-of-pocket when you make the switch.
  • After the conversion, your money is required to stay in your Roth IRA for at least five years before you can take tax-free withdrawals.
  • If you convert too much money, you may be pushed into a higher tax bracket and erode some of the benefits of moving to a Roth IRA
One other retirement reminder: Don’t forget about your old 401(k)s or other work retirement plans. These plans are a vital part of your retirement savings as well.

We can help

If you want to explore whether moving your money from a traditional IRA to Roth IRA may be right for you, please call one of our bankers at 1-800-288-3425 and/or speak to a tax professional.