4 Reasons to Hold Off on Your Roth IRA Conversion

Many investors are choosing to utilize a Roth IRA conversion because of the many benefits they can receive. While it is beneficial for certain investors, there are a few potential drawbacks that you might want to be aware of. Here are a few reasons to hold off on your Roth IRA conversion.

1. Time Considerations

When you are considering whether to roll over to a Roth IRA, you might want to stop and think about when you are going to be withdrawing your money. If you are getting close to retirement age, it might be in your best interest to stay with your current retirement account. With the Roth IRA, you have to wait at least five years after starting the account to withdraw your money without penalty. This means that if you are 55 or older, you are going to have to wait past the normal age of 59 1/2 before you can start taking your money out. If you need that money so that you can retire, this could cause problems for your plan.

2. Tax Bracket Considerations

Before moving money over into a Roth IRA, you are going to want to consider your tax bracket situation. The Roth IRA can be very beneficial to those who are going to be moving up into a higher tax bracket by the time they retire. This way, you are paying taxes on the money at a cheaper marginal tax rate than you would have paid in your retirement years. However, if you are one of those individuals that is going to be in a lower tax bracket when you retire, it would not make sense to roll your funds into a Roth IRA. Look at your tax bracket now and try to make your best guess as to where you will be when you retire. Take this information into consideration before moving your funds into a Roth IRA.

3. Affording the Tax

One of the major drawbacks associated with rolling your funds into a Roth IRA is the tax that you will have to pay for the conversion. If you have been contributing to a traditional IRA, you have been doing so without paying taxes on the money. Therefore, if you are going to transition that money into a Roth IRA, you are going to have to pay taxes before you can do so. If you have a sizable account built up, there could be a large sum of taxes that you are going to have to pay.

4. Income Considerations

With the Roth IRA, you also need to take a look at your current annual income and how much money you believe you will be making in the future. If you make too much money, you will not be able to make contributions to the Roth IRA account. For example, if you are single, you cannot make more than $120,000 to contribute. A married couple together have to make less than $176,000 to contribute.