Financial Literacy

If you are eligible to establish a Roth IRA, you will need to consider if you should roll over your qualified retirement plan money into a traditional IRA and then convert it to a Roth IRA. The analysis is quite complicated and the assumptions regarding your tax bracket before and after retirement will drive the result.

For example, if you estimate that your current tax bracket will be the same as your tax bracket in retirement, it may make sense to convert a traditional IRA to a Roth IRA upon rolling over the qualified retirement money into the traditional IRA.

If, on the other hand, you are currently in a high tax bracket (say 33%), and you estimate your bracket in retirement to be much lower (say 15%), then it may not make sense to convert the traditional IRA to a Roth IRA. See the section Converting a Traditional IRA to a Roth IRA. If you qualify to establish a Roth IRA and are considering rolling your qualified retirement plan money into an IRA, contact your tax professional to help you with a more detailed analysis.

IMPORTANT NOTE: For conversions occurring after 2010, the federal income taxes must be paid in full the following tax year going forward. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. An investor should carefully consider the source of funds used to pay the taxes owed on a Roth conversion. Penalties and taxes may apply if the investor uses money from the IRA as the source for conversion taxes. Consult a tax professional for details.