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Roth conversions: Pros & cons

Would converting from a traditional IRA to a Roth IRA be a smart move for you? It depends.

Analyze your situation first

Deciding whether to convert to a Roth IRA hinges on issues like your tax rate now versus later, the tax bill you'll have to pay to convert, and your future plans for your estate.

Benefits of a Roth IRA conversion

Eliminate federal income tax on your future withdrawals.

Watch your money grow tax-free indefinitely because, as the IRA owner, you won't have to take required minimum distributions (RMDs) during your lifetime.

Leave the IRA as a tax-free bequest for your heirs. Your heirs will have to take annual RMDs, but they won't have to pay any federal income tax on those withdrawals as long as the account's been open for at least 5 years.

Conversion considerations

If your tax bracket drops in the future, you could pay more in taxes to convert now than you would save by eliminating taxes later.

If you have to use money from your IRA to pay for the conversion, you'll give up the chance to have that money grow and compound tax-free.

If you'd like to reduce the tax impact without an "all or nothing" conversion, you can do a partial Roth conversion, but you can't pick and choose which assets to convert.

Your Roth IRA conversion is reversible

If something happens—like your tax rate goes down or you can't afford the immediate tax hit—you can recharacterize your Roth IRA and revert back to a traditional IRA, but there are restrictions and deadlines involved.

How to convert to a Roth IRA online

If you have a traditional IRA with Vanguard, you can convert it to a Vanguard Roth IRA online in just a few easy steps.

If you have a traditional IRA with another financial institution and would like to move it to a Vanguard Roth IRA, give us a call at 800-984-5931. We'll be happy to help.

Start your conversion online

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Talk with an experienced retirement professional.

Call 800-551-8631

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REFERENCE CONTENT

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Required minimum distributions (RMDs)

Most owners of traditional IRAs and employer-sponsored retirement plan accounts (like 401(k)s and 403(b)s) must withdraw part of their tax-deferred savings each year, starting at age 70½. If you withdraw less than the RMD amount, you may owe a 50% penalty tax on the difference. Roth IRAs have no RMDs during the owner's lifetime.

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Compounding

The snowball effect that happens when your earnings generate even more earnings, not only on your original investments, but also on any interest, dividends, and capital gains that accumulate. That means that your "money makes money" and can grow faster over time.

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Convert an existing traditional IRA to an existing Roth IRA

Simply exchange assets from one type of IRA to the other.

Here's how:

  1. Log on to your account.
  2. Under the "My Accounts" menu, select Buy & sell.
  3. Choose Exchange Vanguard funds.
  4. Select the traditional IRA(s) you want to convert.
  5. Choose the Roth IRA(s) you want to receive the converted assets.
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Convert an existing traditional IRA to a new Roth IRA

Start by setting up a Vanguard Roth IRA:

  1. Log on to your account.
  2. From the options at the top of your screen, select Open an account.
  3. Select Open a new account.
  4. When asked where the money is now, select At Vanguard and follow the remaining instructions.

If you hold several funds in your traditional IRA, you can exchange money from only one fund initially. But once your Roth IRA is set up, you'll be able to exchange your other funds.

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Convert a brokerage traditional IRA to a brokerage Roth IRA

If you have a Vanguard Brokerage traditional IRA, you can convert it using our Brokerage IRA conversion form PDF. Conversions online or by phone can only be completed if you have an upgraded Vanguard Brokerage Account or have opened a Vanguard Brokerage Account, which can hold all asset types, including Vanguard mutual funds, within the same account.