Pros and cons of Roth IRA conversion

Whether we admit it or not, taxes will affect many of our personal financial decisions. Avoiding or reducing them affects our choice of where to live, what kind of car we buy, where to send our children to school, whether to buy a house, and many other daily decisions. Everyone tries to limit the taxes they pay. When we invest in retirement, taxes also play an important role.

One potential way to reduce taxes is to invest in a Roth IRA. With a Roth IRA, you can contribute after-tax dollars and withdraw any income tax-free when you retire. In contrast, while you can usually get tax relief from your contributions to a traditional IRA — and the money is tax-free growth — you must pay taxes when you withdraw this money in retirement.

In order to avoid this situation, many investors perform Roth IRA conversions, transferring their funds from traditional IRAs to Roth varieties. This strategy is also known as a backdoor Roth IRA, if it allows investors who normally do not comply with the Roth IRA to set up a back door, so to speak.

Key points

  • Roth IRA conversion allows you to convert traditional IRA to Roth IRA.
  • Roth IRA conversion is also called backdoor Roth IRA.
  • The Roth IRA has no advance tax relief, but donations and income growth are exempt.
  • Any amount you convert is subject to tax, and the amount can be large.

What is Roth IRA conversion?

IRA conversion simply changes the account classification from traditional IRA to Roth IRA. Starting in 2010, the federal government began to allow investors to convert their traditional IRA to Roth IRA, regardless of their income.

Generally speaking, people can invest in a Roth IRA only when the revised adjusted gross income (MAGI) is below a certain limit. For example, if you are married and file a joint tax return, and your annual income in 2021 exceeds US$208,000 (up from US$206,000 in 2020), you cannot invest in a Roth IRA; the threshold for singles and head of household filers is US$140,000 ( (Up from $139,000 in 2019).

But there is no income limit for conversion.

It sounds pretty good? It can—but, like most investment decisions, Roth IRA conversion has its advantages and disadvantages.

Advantages of Roth IRA conversion

One of the main benefits of performing a Roth IRA conversion is that it can lower your taxes in the future. Although the Roth IRA has no upfront tax relief, your contributions and income growth are tax-free. In other words, once you pay taxes on the money that enters the Roth IRA, you are taxed, provided that you have made a qualified distribution.

Although it is impossible to predict the future tax rate, you can estimate whether you will make more money and thus be at a higher level. In many cases, in the long run, you will pay less tax using Roth IRA than using the same amount of traditional IRA.

Another benefit is that you can withdraw your contributions (not income) tax-free at any time for any reason. However, you should not use your Roth IRA like a bank account. Any money you put out now will never have a chance to grow. Even today’s small withdrawals will have a significant impact on the size of your future reserves.

Moving to Ross also means that when you are 72 years old, you will not have to accept the required minimum distribution (RMD) in your account. If you don’t need this money, you can keep your money intact and pass it on to your heirs.

Disadvantages of Roth IRA conversion

The biggest disadvantage of converting to a Roth IRA is the high tax bill. For example, if you have $100,000 in a traditional IRA and convert that amount to a Roth IRA, you will owe $24,000 in taxes (assuming you are within the 24% tax rate). Convert enough, it can even push you to a higher tax bracket.

Of course, when you make a Roth IRA conversion, you may now be at risk of paying a large amount of tax because you may be in a lower tax bracket in the future. Although you can make some educated guesses, you cannot be sure what your future tax rate (and your income) will be.

Another common problem faced by many taxpayers is that when they have other traditional IRAs, simplified employee pensions, or SIMPLE IRA balances elsewhere, they will pay them in full and then convert them. When this happens, you need to calculate the ratio of the taxed money to the total untaxed balance in these accounts (in other words, all the tax deferred account balances from which you deduct contributions and those you don’t have). This percentage is counted as taxable income. Yes, it is complicated. Be sure to get professional help.

Another disadvantage: If you are young, you must keep the funds in the new Roth for five years and make sure you are 59½ years old before you can withdraw any funds. Otherwise, you will not only have to pay taxes on any income, but also a 10% early withdrawal penalty-unless you qualify for some exceptions.


  • Contributions and income growth are tax-free.

  • You can withdraw donations for any reason at any time, tax-free.

  • You don’t have to take the minimum allocation required.

  • Those who normally do not qualify for the Roth IRA can use it to create accounts and tax-free cash pools.


  • When you make a conversion, you need to pay taxes on the conversion—and the amount can be substantial.

  • If your tax rate is lower in the future, you may not benefit.

  • Even if you are 59½ or older, you must wait five years before you can withdraw tax-free.

  • If you have other traditional SEPs, calculating taxes can be complicated. Or a simple IRA that you have not converted.

Pay tax bills for Roth IRA conversion

If you make a Roth IRA conversion, how will you pay the tax bill? When?

Many people don’t realize that they can’t wait until they submit their taxes to pay the converted tax bill. You must send a check as part of the estimated quarterly tax.

The best way to pay taxes is to use funds from different accounts-for example from your savings or cash out when the CD expires. The least popular method is to get funding from the retirement investment you are converting. why is that.

Using your IRA funds instead of paying taxes from a separate account will weaken your future profitability. Going back to our example above: Suppose you converted a traditional IRA of $100,000; after paying taxes, you can only deposit $76,000 into your new Roth account. Looking ahead, you will miss all the interest you should have earned from this money. forever.

Although US$24,000 may not seem like much, compound interest means that in 20 years, at an interest rate of 8%, the currency itself can grow to about US$112,000. In order to pay the tax bill, a lot of money has to be given up.

Bottom line

Roth IRA conversion can be a very powerful tool for your retirement. If your taxes increase due to government increases — or because you earn more, putting you in a higher tax bracket — in the long run, the Roth IRA conversion can save you considerable taxes. In addition, the backdoor strategy opens the door of Ross for high-income earners who are usually not eligible for such IRAs or unable to transfer funds to tax-exempt accounts through any other means.

However, it should be considered that the conversion has several disadvantages. A huge tax bill can be tricky to calculate, especially if you have other IRAs funded by pre-tax funds. It is important to carefully consider whether it makes sense to make a conversion and consult a tax advisor for your specific situation.


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