Converting 401(k) Plans And Traditional IRAs To A Roth Account–Some Investors May Not Benefit From Conversion

Investors have been considering whether they should convert retirement plans, like 401(k)s or traditional IRAs to a Roth account, which may offer more benefits as they enter the age of retirement. Obviously, Roth IRAs have been used by investors because they offer an individual the opportunity to withdraw the earnings they have made tax-free later in life.

Also, there are currently rules in place have allowed certain individuals to convert other forms of retirement accounts into a Roth IRA, but there have been situations which may cause an investor to lose out if they convert their retirement account. Again, many investors typically choose a Roth IRA as a way to begin planning for their retirement because they can withdraw their funds on the earnings without paying taxes, even though they must still pay taxes on their income they invest at the present time.

As example, many people keep traditional IRAs because they are allowed to write off contributions they make to this Individual Retirement Account, but they will be taxed and required to withdraw earnings at a specific age later. While 401(k) plans and traditional IRAs have been quite popular, these new conversion rules which have allowed for some investors to convert their retirement accounts to a Roth IRA may cause trouble for individuals who will have to pay a sizable amount of taxes on this conversion or who may be close to retirement.

Obviously, individuals who have successfully converted other retirement accounts into a Roth IRA have been those who were able to take the hit from taxes which may be levied against this conversion at the present time. Many investors, who may be young, have been able to afford losing some funds from their retirement accounts because of a conversion, but there are advisers who caution older investors as this could cause these individuals to lose money paid on taxes for converting which may not be recouped once they begin withdrawing funds from their retirement account.

While the question as to whether investors should convert to a Roth IRA simply for the tax benefits is something that will be dependent upon investor’s personal financial situation, many financial advisers are suggesting that those individuals who are considering converting to a Roth IRA plan take a close look at not only their current financial situation, but what their tax bracket may be after they retire, how close they are to the age of retirement, and if there are benefits to be gained from converting retirement accounts to a Roth plan.