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Ask the Retirement Expert: Should I Convert My Traditional Retirement Account to a Roth?

Craig Volk, RICP® •  March 11, 2016 | Enjoying Retirement, Your Finances, Ask the Expert

Each week our Northwestern Mutual retirement experts answer your questions. This week’s question:

By Craig Volk

In April of 2000, Craig began his career with Northwestern Mutual. As a Wealth Management Advisor and Retirement Planning Specialist, Craig’s practice focuses on an integrated planning approach involving retirement distribution planning, investment management and wealth distribution.

Should I convert my traditional retirement account to a Roth?

If you had the choice between $100,000 in a Roth IRA or $100,000 in a traditional IRA, you would generally take the Roth IRA. While both let your money grow tax deferred, only the Roth IRA allows you to take money out tax free assuming it is a qualified distribution1 (when you take money out of a traditional account in retirement, it’s taxed as though it’s income).

The problem, of course, is that not everyone can contribute to a Roth IRA, and not all 401(k) plans offer a Roth 401(k) option. In order to convert IRA assets to Roth assets, you usually pay tax on the amount that you convert in the year that you convert it—potentially pushing you into a higher tax bracket and creating a tax liability2. You can, however, convert your pretax IRAs in chunks, over a number of years.

Everyone’s situation is different and there are many factors to consider when converting from a traditional IRA to a Roth IRA. Please consult with your tax advisor.

Some of the following situations make the most sense to convert:

  • You have a desire to leave assets you won’t spend to another generation.
  • You expect a fair amount of passive income (money you don’t have to work hard to get) throughout retirement.
  • You expect large pension payments.

Another reason is that the Roth IRA doesn’t carry required minimum distributions (mandatory distributions) at age 70½ like a traditional IRA does.

While we’re talking about the benefits of a Roth over a traditional retirement account here, it’s important to remember that a solid retirement income plan will include income from a number of different sources. You should work with a financial professional to discuss the pros and cons because the decision should be made on a case-by-case basis.

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Please discuss with your tax advisor whether or not a distribution is qualified.

2 Please consult with your tax advisor about whether or not you should pay this tax out of the account being converted.

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