3 Things to Consider Before Converting Your IRA to a Roth

If you haven’t already, you’ll probably soon see ads and articles urging you to convert your existing Individual Retirement Account, or IRA, to a tax-free Roth IRA. That’s because 2010 is the only year that special conversion rules apply. But should you do it?

What’s The Difference?

First, you need to know the difference between a regular and a Roth IRA… Quite simply, a regular IRA lets you write off money you put in, but you pay taxes on money you take out. A Roth IRA is the opposite, you don’t get to deduct the money you put in, but you don’t have to pay taxes on the money you take out at retirement.

What’s So Special About 2010?

In previous years you couldn’t convert your regular IRA to a Roth IRA if you had high income, and even if you were allowed, you had to pay a whole bunch of income tax and do it all in one year. However, 2010 is going to be different.

Eric Godes of E*TRADE explained it to us… “Previously if you earned a hundred thousand dollars or more, you couldn’t convert from a traditional to a roth. That goes away January 1st, 2010. The second fantastic bonus for all retirement investors is in 2010 you can spread the tax liabilty out over 2 years.”

Should You Convert?

So should you convert? Depends. First, you should know that the tax bill when moving from a regular IRA to a Roth IRA can be huge: up to $30,000 on a $100,000 account. Even spread of two years, that’s a lot of money.

And if the only money you have to pay that income tax is in your IRA, that’s a big mistake. Cashing out your IRA early just to take advantage of potential tax benefits is almost always a loosing scenario.

Also, age matters. The long you have to retirement, the better off you’ll be after making the switch. If you’re just about to retire, it’ll probably cost more to switch from your regular IRA to a Roth than you’d save.

If you think your tax bracket after retirement will be lower than your current one, it’s probably also not going to be worth it to switch.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
8 Ways to Slash the Cost of Homeowners Insurance
8 Ways to Slash the Cost of Homeowners Insurance

Reviewing this critical insurance policy takes a little effort, but it pays off big.

Drivers Give These 5 Car Insurers the Highest Marks
Drivers Give These 5 Car Insurers the Highest Marks

One company claimed the top ranking in several categories.

5 Ways to Save up $500,000 in 15 Years
5 Ways to Save up $500,000 in 15 Years

Even if you’re behind in preparing for retirement, there’s still a way to pull together a solid nest egg if you focus.

Retirees Can Dodge Taxes on These 9 Types of Income
Retirees Can Dodge Taxes on These 9 Types of Income

There are lots of things Uncle Sam can’t touch — so long as you play by the rules.

5 Ways to Put an End to Junk Mail
5 Ways to Put an End to Junk Mail

Here’s how to keep unwanted mail from clogging your mailbox and trash can.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

The Next 5 Groups Who Will Get the COVID-19 Vaccine
The Next 5 Groups Who Will Get the COVID-19 Vaccine

The CDC has unveiled a schedule that likely will determine who gets the next doses.

Am I Eligible for My Mother’s Social Security Benefit?
Am I Eligible for My Mother’s Social Security Benefit?

Can an adult daughter tap into her late mother’s benefit?

11 Generic Products You Should Buy at Costco
11 Generic Products You Should Buy at Costco

Not all generics are worthwhile, but these are among the best from Costco’s Kirkland Signature brand.

8 Tips for Retiring Comfortably on Social Security Alone
8 Tips for Retiring Comfortably on Social Security Alone

It’s never too early to start learning how to live well while living on less.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have all of these documents that are crucial to their golden years — especially during a pandemic.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

9 Small Expenses That Are Bleeding Your Budget Dry
9 Small Expenses That Are Bleeding Your Budget Dry

Keep more of future paychecks by eliminating these budget-busting unnecessary expenses.

The 4 Best Things to Buy in January — and 4 to Avoid
The 4 Best Things to Buy in January — and 4 to Avoid

As a new year dawns, deals abound for some types of products. In other cases, it pays to wait.

11 Huge Retirement Costs That Are Often Overlooked
11 Huge Retirement Costs That Are Often Overlooked

Does your retirement budget account for all of these costs?

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.