Though Roth IRAs permit tax-free growth and withdrawals, they’re not necessarily the best choice for everyone. To help decide between any tax-deductible and tax-deferred plan, such as a Traditional IRA and its tax-free Roth version, consider your current tax bracket and your expected tax bracket at the time you plan to withdraw the funds:
- If you expect your tax bracket at withdrawal to be roughly the same as, or higher than, your current tax rate, you should probably choose the Roth version of the plan.
- If you expect your tax bracket at withdrawal to be significantly lower than your current tax bracket, you should probably choose the standard tax-deductible/tax-deferred version of the plan.
Though helpful as a general guideline, this rule of thumb doesn’t apply to all situations. Even if you expect your tax bracket at withdrawal to be much lower than your current rate, you might still consider a Roth for these reasons:
- Estate planning: Roth IRAs pass to beneficiaries without incurring a federal income tax liability, though they may be subject to estate taxes.
- Control of assets after retirement: Only Roth IRAs allow you to retain complete control over your retirement account assets past age 70 1/2, with no required minimum distributions.
- High income: Even if you earn too much to qualify for a Traditional IRA deduction, you may still qualify to contribute to a tax-free Roth IRA.
Converting a Traditional IRA to a Roth IRA
The IRS allows you to convert Traditional IRAs to Roth IRAs with no penalties. Formerly there was an income limit of $100,000 but that limit was allowed to expire. However, if your income exceeds $183,000, you may be able to convert a retirement plan to a Roth IRA but you won’t be able to make any new contributions.
One catch does apply: when you do the conversion, you’ll have to pay taxes on any gains in the Traditional IRA, even if you’re simply moving those assets into your new Roth IRA.