There's no question that saving for your golden years is a good idea. But choosing the right place to grow your wealth can be tricky.
Many people contribute to a traditional IRA but later decide to move the money into a Roth IRA instead. Fortunately, the law allows you to make such a conversion.
Here are a few instances where converting your traditional IRA into a Roth IRA might pay off.
Earn cash back on everyday purchases with this rare account
Want to earn cash back on your everyday purchases without using a credit card? With the Discover®️ Cashback Debit Checking account (member FDIC), you can earn 1% cash back on up to $3,000 in debit card purchases each month!1
With no credit check to apply and no monthly fees to worry about, you can earn nearly passive income on purchases you’re making anyway — up to an extra $360 a year!
This rare checking account has other great perks too, like access to your paycheck up to 2 days early with Early Pay, no minimum deposit or monthly balance requirements, over 60K fee-free ATMs, and the ability to add cash to your account at Walmart stores nationwide.
Don’t leave money on the table — it only takes minutes to apply and it won’t impact your credit score.
What is a Roth IRA?
Roth IRAs differ from traditional IRAs in a few ways. The biggest difference is in how a Roth IRA contribution is taxed.
Unlike with a traditional IRA, you don't get a deduction in the year of your contribution. However, the money does grow tax-free, and you can withdraw the funds tax-free during retirement.
Tax-free withdrawals are a major benefit of a Roth, but there are others. You do not have to make required minimum distributions, and passing down a Roth IRA to heirs gives them tax advantages.
In many cases, contributions can be withdrawn at any time without penalty, although early earnings withdrawals may incur taxes and penalties.
Here are some situations where converting a traditional IRA to a Roth IRA might make sense.
You make too much money
This is a good problem to have, but if you make too much money, you might be ineligible to contribute to a Roth IRA.
For example, to contribute the full amount to a Roth, you must have a modified adjusted gross income of less than $146,000 if you are a single filer or less than $230,000 for married couples.
Fortunately, high earners can indirectly contribute to a Roth IRA. With this “backdoor” strategy, you first open a traditional IRA and make a nondeductible contribution. Then, you convert the IRA to a Roth IRA.
You can afford to pay the taxes right away
The tax man cometh for us all.
When you convert funds from a traditional IRA or 401(k) to a Roth IRA, you'll have to pay taxes on the converted amount. If you have the money to do so, a conversion can make sense.
It’s best to cover the tax owed with savings you have already accumulated instead of holding back part of the converted amount. This allows more money to grow tax-free in the Roth.
Earn $200 cash rewards bonus with this incredible card
There's a credit card that's making waves with its amazing bonus and benefits. The Wells Fargo Active Cash® Card(Rates and fees) has no annual fee and you can earn $200 after spending $500 in purchases in the first 3 months.
The Active Cash Card puts cash back into your wallet. Cardholders can earn unlimited 2% cash rewards on purchases — easy! That's one of the best cash rewards options available.
This card also offers an intro APR of 0% for 12 months from account opening on purchases and qualifying balance transfers (then 19.74%, 24.74%, or 29.74% Variable). Which is great for someone who wants a break from high interest rates, while still earning rewards.
The best part? There's no annual fee.
You're already retired
Converting to a Roth IRA early in retirement — when income is typically lower than it was during your working years — can reduce your tax bill on the conversion.
In fact, you might consider slowly converting to a Roth over several years as a way to keep your overall tax on the conversion lower. Consult with a tax professional to craft the best strategy for keeping your taxes low.
You expect to pay higher taxes in retirement
If you've built up a large nest egg — or if you are looking ahead and expecting your portfolio to grow by leaps and bounds — there is a chance that your taxes will actually be higher during retirement than they are during your working years.
In some cases, converting to a Roth IRA during your working years or gradually doing so early in retirement will cost less in taxes than waiting to make withdrawals from a traditional IRA later on.
Converting can also make sense if you currently live in a low-tax state — such as Texas, which has no state income tax — but plan to move to a high-tax state, such as California, later on.
Trending Stories
The stock market has fallen
Nobody likes to see their account balance fall due to a bear market in stocks. But you can take advantage of such a downturn by converting to a Roth IRA.
Because your balance is lower, you'll pay less in taxes on the conversion. With any luck, your balance will eventually rebound after converting to a Roth IRA, and all your gains will be tax-free.
You lose your job or see income fall for another reason
Losing a job is never fun. But one silver lining to a job loss or other income drop is that it creates the opportunity for a Roth IRA conversion at lower tax rates.
Converting funds from a traditional IRA to a Roth IRA counts as ordinary income and will be taxed according to your tax bracket. So, it might be smart to make the conversion in a year when your income is unusually low.
You have time to let the money grow
Leaving a converted amount of cash in your Roth IRA for as long as possible maximizes its tax-free growth. That helps offset the initial cost of paying taxes at the time of conversion.
In addition, having more time to let the money grow can benefit your heirs. More on that in a moment.
You intend to leave money to heirs
A Roth conversion can be a good option if you want to provide tax-free income to your heirs. Non-spousal beneficiaries typically don’t get the same tax advantages as spouses, so a Roth conversion can make sense when leaving money to children or others.
Most withdrawals from an inherited Roth are tax-free. However, if the Roth is less than five years old, earnings withdrawals may be subject to income tax.
If you’re over 50, take advantage of massive discounts and financial resources
Over 50? Join AARP today — because if you’re not a member you could be missing out on huge perks. When you start your membership today, you can get discounts on things like travel, meal deliveries, eyeglasses, prescriptions that aren’t covered by insurance and more.
How to become a member today:
- Go here, select your free gift, and click “Join Today”
- Create your account (important!) by answering a few simple questions
- Start enjoying your discounts and perks!
You’ll also get insider info on social security, job listings, caregiving, and retirement planning. And you’ll get access to AARP’s Fraud Watch Network to help you protect your money, as well as tools to help you plan for retirement.
Important: Start your membership by creating an account here and filling in all of the information (Do not skip this step!) Doing so will allow you to take up 25% off your AARP membership, making it just $12 per year with auto-renewal.
Bottom line
A Roth conversion might not be the right move for everyone, but it can help others eliminate some money stress.
One key to making a successful Roth conversion is to undertake the process at the right time. If you're unsure of whether this strategy makes sense for you, consult with a financial advisor or tax professional.
Lucrative, Flat-Rate Cash Rewards
FinanceBuzz writers and editors score cards based on a number of objective features as well as our expert editorial assessment. Our partners do not influence how we rate products.
Wells Fargo Active Cash® Card
Current Offer
$200 cash rewards bonus after spending $500 in purchases in the first 3 months
Annual Fee
$0
Rewards Rate
Earn unlimited 2% cash rewards on purchases
Benefits
- Low spend threshold for its welcome offer — $200 cash rewards bonus after spending $500 in purchases in the first 3 months
- Cell phone protection benefit (subject to a $25 deductible)
- Can redeem rewards at an ATM for literal cash
Drawbacks
- Foreign transaction fee of 3%
- No bonus categories
- Select “Apply Now” to take advantage of this specific offer and learn more about product features, terms and conditions.
- Earn a $200 cash rewards bonus after spending $500 in purchases in the first 3 months.
- Earn unlimited 2% cash rewards on purchases.
- 0% intro APR for 12 months from account opening on purchases and qualifying balance transfers. 19.74%, 24.74%, or 29.74% Variable APR thereafter; balance transfers made within 120 days qualify for the intro rate and fee of 3% then a BT fee of up to 5%, min: $5.
- $0 annual fee.
- No categories to track or remember and cash rewards don’t expire as long as your account remains open.
- Find tickets to top sports and entertainment events, book travel, make dinner reservations and more with your complimentary 24/7 Visa Signature® Concierge.
- Up to $600 of cell phone protection against damage or theft. Subject to a $25 deductible.
Subscribe Today
Want extra-cash moves to come right to you?
Stop browsing endlessly. Get proven ways to earn pocket money, help cover rent, and crush your debt — sent to your inbox daily.