Roth IRA Conversion Rules Bring Tax Benefits But Some Investors Are Warned Against Converting To A Roth Account

Recent rules about converting to a Roth IRA have many considering changing their current retirement plan over to a Roth account. While there are numerous tax advantages that can be used with a Roth IRA, there are some financial advisers who are warning investors against converting, as it may not always be in someone’s best interest.

Obviously, those who convert to a Roth account are usually looking at the benefits which can be seen when an investor is able to begin withdrawing earnings. Roth IRAs allow the investor to withdraw their earnings tax-free, but for some individuals who are either at a specific point in their investing life or are near retirement, converting to a Roth account could be more costly.

Understandably, there are taxes which will be required of the investor if they convert, for instance, a traditional IRA to a Roth IRA. If an investor is unable to pay these taxes, or the required taxes that they must paid will have to come from funds within an Individual Retirement Account, this may be unhelpful for an investor in the long run. If an investor must begin using money that they have earned to pay taxes on a conversion, they may be unable to recoup these losses or they simply may find themselves in a position where they would have profited more so if they had stayed with their first retirement plan.

There’s also the concern that some investors who may be close to retirement should not convert, as they will begin making withdrawals and could be unable to recoup losses which are sustained from taxes that are required. Again, many see only the benefits of a Roth IRA simply in the form of tax-free withdrawals on earnings, but for investors who will begin using money in a Roth IRA in the near future, losses sustained through fees for a conversion may reduce their overall retirement fund.

While there are some investors who can benefit from these rules on converting to a Roth IRA and taxes associated with doing so, investment counselors have cautioned some from this course of action on their retirement plan.  It will depend on an investor’s personal situation as to whether converting is a good idea or not, and for this reason converting to a Roth IRA may require some research.