Here is a short little article giving five questions you should ask yourself before converting a traditional IRA into a Roth IRA. With taxes likely going up in a few weeks, many are considering the conversion to a Roth to pay taxes now while they’re low and reap the rewards of tax-free distributions in the future. There are factors to consider before converting:
1. When do you need the money? If you need it sooner rather than later, it’s best not to convert since the whole point of the conversion is to allow the money to grow tax-free for a long time.
2. Where will the money come from to pay the tax? After converting, you need to pay the tax. It doesn’t make sense to use money from the IRA to pay it off so do you have the funds available to pay that tax?
3. What are the rates going to be in the future? If you think rates are going up like most people, then now is the time to convert.
4. Other reasons to convert: favorable tax attributes this year; you will not need to make required minimum distributions at age 70 1/2; ability to make contributions after that age; providing an income tax-free inheritance.
5. Other reason to not convert: you don’t trust that the Roth will be tax-free in the future; you plan on leaving the money to a charity (which will receive the money tax-free anyway).