Should You Convert Your Regular IRA to a Roth?

One of the most common questions encountered by tax and financial professionals is whether their clients should convert their regular IRA accounts to Roth IRA accounts. Unfortunately, there is no simple answer to this important question, and it is important for every investor to examine his or her own situation before making a final decision.

One of the most critical factors for many investors will be the taxes that would be triggered by such a conversion. When the funds in a regular IRA are converted, the taxes on the earnings will have to be paid, and if the IRA has been in place for a long time there may be significant taxes involved. Your accountant or tax preparer should be able to help you determine the tax liability that would be triggered by the conversion to a Roth IRA.

Of course the idea behind converting a regular IRA account to a Roth IRA is that the investor is paying the taxes today in exchange for tax free treatment when the funds are withdrawn. The idea, of course, is that the money in the Roth IRA will continue to grow and accumulate, and that the withdrawals in retirement will be tax free. This can be a smart move, especially for investors who expect to be in a higher tax bracket in retirement. For investors with a lot of savings and investments, this may well be the case.

In addition, many investors expect that the economic realities we see today, from underfunding of Social Security and Medicare to huge budget deficits, will leave future governments with no choice but to significantly increase taxes. If this happens, those with Roth IRAs may well be in an excellent position, and many investors are choosing Roth IRAs and Roth 401(k) programs for just such a reason.

No matter where you expect tax rates to be in the future, the conversion of a regular IRA to a Roth is not a decision to be made lightly. There are significant tax implications to such a move, and it is important to get plenty of advice from trusted advisors before making such an important decision. It may be a good idea to sit down with a good tax planner or accountant to run the numbers and determine if this move makes sense in your situation. Everyone’s financial situation is different, and it is important to take stock of your own needs before making such a major decision.

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