When a Roth Conversion May Not Be the Right Choice

A Roth conversion can be a great financial tool to manage taxes and pass wealth to heirs, but it’s not always the best option for everyone. While converting a traditional IRA or 401(k) into a Roth IRA allows you to pay taxes now and enjoy tax-free withdrawals later, there are situations where this strategy might not be in your best interest. Let’s explore four key reasons why a Roth conversion may not be the right choice for you.

Watch Now

1. Your Heirs Have a Lower Tax Rate

One of the primary reasons to reconsider a Roth conversion is if your beneficiaries are in a lower tax bracket than you. When you convert to a Roth IRA, you pay taxes at your current tax rate. However, if your children or other heirs inherit a traditional IRA, they will pay taxes on distributions at their own tax rate. If their tax bracket is lower than yours, it might be more cost-effective to leave the funds in a traditional IRA. For example:

• If you’re in the 22% tax bracket but your heirs are in the 12% bracket, they would pay 10% less in taxes than you would on those funds.
• Even if you and your heirs have similar tax rates, the advantage of a Roth conversion diminishes.

2. You Need the IRA for Retirement Income

If your IRA is your primary source of retirement income, converting to a Roth IRA may not be financially beneficial. Here’s why:

• Converting requires paying taxes upfront, which could significantly reduce your retirement savings.
• If you rely on those funds for daily expenses, taking money out just to pay taxes may not be wise.
• For those over age 73 who must take Required Minimum Distributions (RMDs), a Roth conversion could increase your tax burden in the short term.

3. Your Beneficiaries Won’t Benefit

Roth conversions are particularly useful for passing wealth to heirs, but they may not make sense if you plan to leave your assets to a charity. Nonprofit organizations don’t pay taxes on inherited IRA funds, so converting to a Roth means you would be paying taxes unnecessarily. In this case, leaving a traditional IRA to a charity is the more tax-efficient choice.

4. Your IRA Is a Small Part of Your Wealth

If your IRA represents a small percentage of your total assets, a Roth conversion might not be worth the cost. Consider this scenario:

• You have a $120,000 IRA and plan to leave it to your three children.
• Each child would inherit $40,000 and would take distributions over a decade.
• Their annual taxable distribution would be around $4,000, which is unlikely to push them into a higher tax bracket.

In such cases, paying a large tax bill upfront to convert to a Roth may not make financial sense.

Making the Right Decision

Determining whether a Roth conversion is right for you requires careful analysis. Factors such as current and future tax rates, income needs, and inheritance plans all play a role in this decision. Our Financial Advisors can help you evaluate your situation and use specialized tools to visualize different scenarios.  If you find yourself thinking about any of these, give us a call.

• When should you not do a Roth conversion?
• Best reasons to skip Roth conversion
• Roth IRA conversion tax mistakes
• IRA vs. Roth IRA for inheritance planning
• Financial planning for Roth conversions
• Roth conversion impact on retirement income
• Should I convert my IRA if I need retirement income?
• Pros and cons of Roth conversions for estate planning
• How tax brackets affect Roth conversions