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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 of a conversion, you can do a partial Roth conversion. But keep in mind, the amount you convert is generally considered taxable income; that is, you can't choose to only convert your nontaxable assets (and leave your taxable assets in the account).

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.

Ready to get started?

You can convert a Vanguard traditional IRA to a Roth IRA in a few easy steps.

We're here to help

Talk with an experienced retirement professional.

Call 800-551-8631

Monday through Friday
8 a.m. to 8 p.m., Eastern time

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.