Sunday, December 5, 2021

To Roth or Not to Roth?



Darcie Guerin

“They are able because they think they are able.” ~ Virgil, 70 BC – 19 BC, Ancient Roman Poet


Question: What is the difference between a Roth IRA and a regular IRA? Is it true that I can convert my traditional IRA to a Roth IRA?

Answer: Individual Retirement Accounts (IRAs) are personal savings plans that provide tax benefits. The IRS allows certain favorable treatment of these assets to encourage U.S. taxpayers to contribute to these accounts as way to take responsibility for their future financial well-being. Let’s start by identifying differences and similarities of these two retirement plans to find your answers.

Traditional IRA

Created in 1974, the traditional IRA allows qualified income earners to invest a pretax amount each year into an account that grows tax deferred until the funds are withdrawn (after age 59½) and then taxed as regular income. At age 70½, you must begin taking required minimum distributions (RMDs). RMD’s are generally subject to federal income tax and may be subject to state taxes.

Roth IRA

In 1998, Senator Roth of Delaware turned the original IRA idea upside down. Roth IRA contributions are made with after-tax money, the investments grow tax-free and distributions taken after attaining age 59½ are tax-free (if you’ve owned the account for at least five years). 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. There are no RMDs from Roth accounts, so switching traditional IRAs into Roth IRAs appeals to many investors. Both plans provide tax-deferred growth and for 2015 allow for maximum annual contributions of up to $5500 of earned income, plus an additional “catch-up” contribution of $1,000, for a total of $6,500 for those of us over age 50. Another caveat is that if your annual income is greater than $116,000 for individuals or $183,000 for married couples filing jointly, the allowable contribution to a Roth IRA may be reduced or eliminated.

Conversion Factors

If you’re thinking of converting a traditional IRA to a Roth IRA, consider these factors before taking any action:

  • Amounts converted from a traditional IRA are treated as regular income and may push you into a higher tax bracket. Taxes will be due on the pretax contributions and earnings converted to a Roth IRA in the year you convert. It is recommended that a source other than IRA money is available to pay any taxes. Consider converting small amounts over time to spread the tax hit over several years.
  • Evaluate if there is enough time before you retire for the Roth to sufficiently grow and offset capital lost due to taxes.
  • Will you withdraw funds from your Roth during retirement, and will your post-retirement tax bracket drop (say from 25% to 15%)? If so, a conversion may not make sense because you’ll be paying a lower rate on your post-retirement traditional IRA distributions than you paid to convert.
  • Are you leaving all your IRA money to heirs? If so, converting probably makes sense because the Roth doesn’t require you or your surviving spouse to deplete the funds during your lifetimes by taking RMDs.
  • Unlike a traditional IRA, there are no age limits on contributions as long as you have earned income, even if you’re over age 70 ½. Since we’re living longer, it may make sense to continue contributing if you’re still working.
  • Since Roth IRAs don’t have RMDs after age 70 ½ those assets can remain invested. Traditional IRA RMDs are typically counted as taxable income. (Roth accounts will require RMDs after the death of the owner).
  • There may be estate planning techniques available to Roth IRA owners that could potentially allow accounts to keep growing before being distributed to heirs. Be sure to consult your estate planning team to determine if it makes sense to use a Roth IRA as an inheritance vehicle.
  • Because you can take out any or all of your Roth IRA contributions at any time and for any reason, without taxes or penalties (only earnings are subject to restrictions on withdrawals), you maintain greater control.

Personal goals and circumstances will determine which type of IRA is right for you. For those looking to minimize taxes during retirement or preserve assets for heirs, a Roth IRA may be the way to go. A traditional IRA may make more sense if you can make deductible contributions and want to lower taxes while you’re still working.

As we tell the grandkids, just because you can do something, it doesn’t mean that you should. This premise holds true for conversion of your traditional individual retirement account to a Roth account. The right answer is determined after examining personal income tax rates, estate planning needs, current cash flow requirements, and an educated guess about future tax rates. As is the case with so many financial decisions, the answer will likely be “it depends.”

We’d be happy to provide a personalized confidential comparison illustrating the difference between the two retirement plans to assist with your decision making process. Stay focused and plan accordingly.

The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. Call or email Darcie at (239)389-1041 or with questions or suggestions for future columns. Visit her website:



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