Roth IRA conversions let you bulk up your retirement savings by converting tax-deferred future income into tax-free future income. But there are some drawbacks. Here's are the pros and cons of a Roth IRA conversion.

Roth IRA conversions have become a popular topic among financial blogs. The basic idea is that by converting various retirement plans into a Roth IRA, you convert tax-deferred future income into tax-free future income.

That’s certainly a great strategic move, but is it always the right thing to do?

Let’s drill down into the pros and cons of a Roth IRA conversion. That way you can see the benefits and disadvantages of this surprisingly complex strategy.

The pros of a Roth IRA conversion

Converting tax-deferred retirement money to tax-free

When you save and invest for retirement through a traditional IRA, 401(k), 403(b), or other retirement plan, you get the benefit of tax-deductible contributions, as well as tax-deferred investment income. But all that money—both the contributions and the investment earnings—are tax deferred. That means you’ll enjoy tax benefits during the accumulation phase, but will eventually pay tax when you withdraw the money.

The primary benefit of a Roth IRA is the fact that you can take distributions from the plan that will be completely tax-free. The contributions to a Roth IRA are not tax-deductible, though the investment earnings accumulate on a tax-deferred basis, the same way they do with other retirement plans. But as long as you are in the plan for at least five years, and you begin taking withdrawals after turning age 59 ½, those distributions will be completely tax-free.

You can withdraw converted balances at any time, free from tax

There’s a provision with Roth IRA contributions that they can be withdrawn at any time, free from income tax and penalties. This makes sense, since Roth IRA contributions are not tax-deductible. But there’s more.

Roth IRA withdrawals are not subject to the pro rata rules that apply to other retirement plans. For example, when you attempt to withdraw nondeductible contributions from a traditional IRA, the withdrawal has to be prorated between the nondeductible contributions, the deductible contributions, and the investment earnings.

That being the case, if 40 percent of your total plan is nondeductible contributions, but 60 percent represents deductible contributions and investment earnings, then 60 percent of any distribution will be taxable. This rule does not apply with distributions of Roth IRA contributions.

When you convert other retirement funds to a Roth IRA, that converted balance is also available for withdrawal – after all, you will have already paid tax on the converted amount. This is one of the major reasons why Roth IRAs are sometimes used as emergency funds (though we’re not making that suggestion here!).

Related: How To Do A Roth Conversion

Using it with a non-deductible contribution to a traditional IRA

The IRS imposes income limits on the tax deductibility of contributions to a traditional IRA if either you or your spouse or covered by an employer-sponsored retirement plan. But that can actually be an advantage for a Roth IRA conversion.

You can make the nondeductible contribution to your traditional IRA, and then convert the balance shortly after to a Roth IRA. Since you did not get a tax deduction for the contribution, there will be no tax liability when the traditional IRA contribution is converted to a Roth IRA. This is what is commonly referred to as a backdoor Roth IRA contribution.

Adding a tax-free income source to an otherwise taxable retirement mix

Once again, we come back to the concept of tax-deferred income. If you accumulate a large enough retirement portfolio, you could be in a much higher income tax bracket than you ever assume. This is especially possible when you add Social Security, pension income, and any non-tax-sheltered investment income to the mix.

But since Roth IRA withdrawals are tax-free, they can provide you with a source of income that does not increase your tax liability. You may even be able to use Roth distributions instead of other taxable retirement distributions, during retirement years when your income will be especially high. A Roth IRA gives you that option.

No Required Minimum Distributions (RMDs)

Virtually all tax-sheltered retirement plans require RMD’s, beginning no later than age 70 ½. Generally speaking, the balance in your retirement plans is divided by your remaining life expectancy at that age, and the percentage is used to determine the amount of the distribution.

Unlike other retirement plans. Roth IRAs do not require RMD’s. This will enable you to continue increasing the value of your plan throughout your life. And that will help to ensure that you won’t ever outlive your money, or that you will have money available to pass on to your heirs.

By converting other retirement plans to a Roth IRA, you increase the amount of money that you will have that will not be subject to RMD’s.

The Cons of a Roth IRA Conversion

The income tax paid on the converted balance

This is typically the single biggest disadvantage to doing a Roth IRA conversion. The amount of retirement proceeds that represent tax-deductible contributions and tax-deferred investment earnings become fully taxable on conversion.

For example, if you are converting $50,000 from a traditional IRA to a Roth IRA, and you’re in the 15 percent tax bracket, you will have to pay $7,500 in federal income tax. You will also likely have to pay the marginal tax rate for state income tax, if your state has one. However, you will not have to pay the 10 percent early withdrawal penalty if you’re under age 59 ½.

The conversion itself could push you into a higher tax bracket

Since Roth IRA conversions often represent large amounts of money, it’s entirely possible that the conversion could push you into a higher tax bracket.

For example, let’s say that you are currently in the 15 percent tax bracket and you are about to do a Roth conversion of $50,000. It’s possible that at least some of the conversion balance will fall into the 25 percent tax bracket. That can make the conversion even more costly.

Finding the money to pay the tax on the conversion

This is frequently a problem, particularly on large conversion balances. If you don’t have liquid assets available to pay the tax liability on the Roth conversion, you may have to have withholding tax taken from the converted balance.

The problem here is that not all of the distributed retirement money makes it to the Roth conversion. If you have 20 percent of a traditional IRA withheld for taxes, only 80 percent of the plan will be available for the conversion. In that way, you will be reducing the amount of retirement assets that are going from the traditional IRA into the Roth IRA.

The “five year waiting period” on withdrawals

While you can withdraw contributions and converted balances from a Roth IRA at any time, investment earnings from a Roth conversion are subject to a five-year waiting period. If you withdraw money before the end of five years, the investment earnings will be subject to ordinary income tax. And if you’re under 59 ½, they will also be subject to the 10 percent early withdrawal penalty.

If you’re over 59 ½, the distributions will not be subject to income tax, but the investment earnings portion will be subject to the 10 percent early withdrawal penalty.

The five-year rule is complex. For a more complete discussion of this rule, Michael Kitces at Nerd’s Eye View has an extensive and comprehensive article on the topic.


If you’re contemplating doing a Roth IRA conversion, and you’re not sure if it will work to your advantage, set up a meeting with your tax preparer—preferably a CPA—and discuss the tax implications and other factors.

Have you ever done a Roth IRA conversion? Do you think that the benefits outweigh the disadvantages, like paying income tax up front?

Read more

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About the author

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Since 2009, Kevin Mercadante has been sharing his journey from a washed-up mortgage loan officer emerging from the Financial Meltdown as a contract/self-employed “slash worker” – accountant/blogger/freelance web content writer – on Out of Your He offers career strategies, from dealing with under-employment to transitioning into self-employment, and provides “Alt-retirement strategies” for the vast majority who won’t retire to the beach as millionaires. He also frequently discusses the big-picture trends that are putting the squeeze on the bottom 90%, offering work-arounds and expense cutting tips to help readers carve out more money to save in their budgets – a.k.a., breaking the “savings barrier” and transitioning from debtor to saver. He’s a regular contributor/staff writer for as many as a dozen financial blogs and websites, including Money Under 30, Investor Junkie and The Dough Roller.