Roth IRA Conversion Advantages and Disadvantages

No one enjoys talking about taxes, but they’re critical since they play a significant role in long-term financial decisions. Take retirement, for example. Taxes are highly influential. Fortunately, there are ways to reduce the amount of tax paid at the time of retirement. One is to invest in a Roth IRA. With that, you contribute after-tax dollars. But you also get to withdraw tax-free earnings when you retire. Typically, you’ll get a tax deduction with a traditional IRA. For that type of account, the money grows without the application of taxes. However, if you decide to withdraw any of the funds, you’d pay taxes.

Roth IRA Conversion Advantages and Disadvantages from North Carolina Lifestyle Blogger Adventures of Frugal Mom

To avoid that, you might think about a Roth IRA conversion. For that, you’d move your money from a traditional IRA to a Roth. Some people refer to this as a “backdoor Roth IRA” since it creates an opening for people who would otherwise not qualify.

Overview of a Roth IRA Conversion

You can convert to a Roth IRA regardless of the amount of income earned. Now, with a conventional Roth IRA, you’d need a modified adjusted gross income that’s lower than a specific level. For instance, if you and your spouse file taxes jointly while earning over $206,000 annually in 2020, you couldn’t opt for this kind of Roth IRA. The same goes for someone filing single as head of household who earns more than $139,000.

In comparison, no income limits apply when converting a traditional IRA to a Roth IRA. But before deciding, you should consider both the advantages and disadvantages.

Calculating the pros and cons of a Roth IRA conversion is not as easy as it might sound. There are many moving parts and free online calculators are not accurate enough for such an important decision. There is planning software out there that can help though. Retirement planning software such as WealthTrace allows you to run what-if scenarios on Roth conversions to see if it makes sense for you. The software takes into account all tax laws and investment account types and is much more accurate than free planning calculators. 

Roth IRA Conversion – Advantages

The most significant advantage is the reduction of taxes long-term. While you won’t get a tax break upfront, both earnings and contributions grow tax-free. That means after paying taxes on the money you that invest, you won’t pay more as long as you choose a qualified distribution.

There’s another benefit of a Roth IRA conversion. You can withdraw your contributions, not earnings, any time. However, that money won’t grow, and taking out even a small contribution could significantly impact the amount of income you have at retirement.

Also, by converting to a Roth IRA, you don’t have to take the minimum distribution until the age of 72. If preferred, you can leave the money alone and give it to your beneficiaries.

Roth IRA Conversion – Disadvantages

For one thing, you can expect to see a large tax bill. As an example, if you invested $100,000 in a traditional IRA account but then decided to convert to a Roth IRA, you would have to pay $24,000 in taxes if you fell in the 24 percent tax bracket. Depending on the amount you convert, that could bump you to an even higher tax bracket, meaning you’d owe even more.

Another risk has to do with contributing the full amount of your traditional IRA if you have a SIMPLE IRA. In that case, you’d have to come up with a ratio of the monies in both accounts already taxed compared to the aggregate balances not yet taxed. Whatever percentage you come up with becomes taxable income.

One more thing, the money must stay in the Roth account for a minimum of five years, even if you’re already 59.5 years of age. If not, you’ll end up paying taxes on all earnings, as well as a 10 percent penalty for early withdrawal.

Roth IRA Conversion – Tax Bill

Experts strongly recommend that people pay the taxes using their checking or savings account or a mature CD. If necessary, you could take money from the retirement investment account you’re converting to, but that’s not recommended. By doing so, your future earning power diminishes. 

Using the same example, say you converted $100,000, paid $24,000 in taxes, and ended up with $76,000 for the new Roth IRA account. You’d lose out on the interest you could’ve earned on that money, not just temporarily but forever.

Putting $76,0000 into a Roth IRA sounds good. But as compounded tax, in just 20 years, the $24,000 you paid in taxes would grow to $112,000 at an interest rate of 8 percent. So, you could lose an additional $88,000.


When deciding on your retirement future, you shouldn’t automatically discount a Roth IRA conversion. Under many circumstances, including higher wages and increased taxes, this is an excellent way to save a lot of money over the long haul.

Also, with the “back door” strategy, someone who is ineligible for a Roth IRA has a way to do the conversion. Overall, this is a powerful tool that might be worthwhile. Of course, you have to consider the disadvantages. Of those, a hefty tax bill is the most prominent.

If converting a traditional IRA to a Roth IRA sounds like a good plan, first talk to a qualified financial expert. A licensed tax advisor can go over the specifics relating to you and then provide the soundest advice.


  • A Roth IRA conversion allows you to convert a traditional IRA to a Roth IRA
  • This conversion is often referred to as a “backdoor Roth IRA”
  • A Roth IRA doesn’t have any upfront tax breaks, but both earnings and contributions grow tax-free
  • Regardless of the amount you convert, you’ll have to pay taxes, which are typically substantial

For most people, the conversion process feels overwhelmingly complicated. This is why working with a professional is essential.

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