A Roth conversion is when you convert taxable money from an IRA to a tax-free growth vehicle, like a Roth IRA. If you feel that you're going to convert at a lower tax rate today than what you will be paying in the future, then it makes sense to do an IRA to a Roth conversion.

Your Current and Future Tax Bracket

For example, if you retired at 65, and are not taking social security yet, maybe you're living off brokerage account income, so your taxable income is near zero. You could convert at a very low, maybe 0, or a 12% tax bracket in that situation. This makes sense because more than likely, you'll be closer to a 22% tax bracket in the future.

If you are in the 12% tax bracket and you know you're always going to be in the 12% bracket, then it doesn't make sense to do the conversion unless you are doing it for estate planning reasons. So if your children are in a higher tax bracket and you are planning to pass money down to them, it makes sense to convert money from an IRA to a Roth at 12% so that you can pass it to them tax-free. Otherwise, it doesn’t seem reasonable to apply the conversion because it becomes a matter of paying the taxes now or later. You would want to pay the tax bill whenever your taxes are lowest, because it allows your money to grow and work for you longer before the tax is actually owed.

Will taxes be higher in the future?

Another question people sometimes ask is if taxes will be higher in the future. The answer to this question depends on your situation. For example, if you're a high-income earner, then yes they probably will be higher, especially if you're making over $400,000 a year. However, under the $400,000 level, and even below the $150,000 level taxes probably won’t be higher for you in the future.

Remember to take these things into consideration when converting from an IRA to a Roth with taxable money.

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