A Roth conversion is a way to transfer all or part of your Traditional IRA into a Roth IRA. Since Betterment cannot provide tax advice on how this will affect your specific tax situation, we recommend you consult a tax advisor and IRS Publication 590.
Benefits of a Roth Conversion:
- You generally won’t have to pay taxes when you withdraw money at retirement, as long as you have had the account for more than five years and are over 59½ or disabled. If you think your tax rate will be the same or higher than your current rate when you withdraw your money, paying taxes now could be beneficial.
- There are no required minimum distributions after you retire.
- There are no income limits to converting to a Roth IRA. Find out more by clicking here.
*Disadvantages of a Roth Conversion:
- You may have to pay income taxes now on conversion amounts that were previously deducted from your income. Betterment will not withhold these funds for you.
- The converted amount will be added to your adjusted gross income for the year, and could potentially increase your tax bracket overall.
- Taxpayers with incomes or an adjustable gross income (AGI) over $200,000 who file individually or $250,000 for married couples filing jointly could be subject to a 3.8 percent tax on income from interest, dividends, annuities, royalties and rents which are not derived in the ordinary course of trade or business. Exceptions apply. You can read more about the tax by clicking here.**
Please note that if you live in Michigan, there are special requirements for completing your conversion.
Can I Undo a Roth IRA Conversion?
Prior to federal tax law changes that went into effect January 1, 2018, investors had the option to execute a "recharacterization," undoing a Roth IRA conversion. Since then, recharacterizations are no longer allowed.
Before executing a Roth IRA conversion, you should consult with a tax professional about the specifics of your situation.