Should you convert your Traditional (pre-tax) IRA to a Roth IRA in 2010?

Updated: September 1, 2015

The US Congress, in the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2006, eliminated the income limit for conversions from pre-tax retirement accounts (Traditional IRAs (including Rollover IRAs) and 401(k)s, 457s, and 403(b)s) to Roth IRAs as of 2010. Before 2010, your (Modified Adjusted Gross) income had to be less than $100,000 for you to be able to convert. Beginning in 2010, anyone, regardless of income, can convert his or her pretax retirement accounts into Roth IRAs. To avoid having to say pre-tax retirement assets (Traditional IRAs (including Rollover IRAs) and 401(k)s, 457s, and 403(b)s every time, I’ll just refer to all such assets as “Traditional” from now on.)

Should you convert any of your Traditional assets into Roth IRA assets?

Yes, if at least one of the following is true:

No, if none of these reasons applies to you.

Read on for some analysis that will help you think about that question. However, I recommend that you get personal objective professional advice before you make a decision. The rules are complicated, and this brief article can’t address every detail of your situation.1, 2

The table summarizes the major differences between Traditional accounts and Roth accounts.

  1. You see one big difference right away, when you make retirement contributions. With a Traditional, your taxable income does not include your contribution, so contributing will reduce your taxes. On the other hand, withdrawals count as taxable income – withdrawing will increase your taxes. With Roth accounts, you cannot deduct your contributions from income, so your income taxes don’t change if you contribute. Withdrawals from Roth accounts are not taxable income, however: you can withdraw as much as you want without paying any tax later on (after age 59½).
  2. With a Traditional, you must make a withdrawal (Minimum Required Distribution, or MRD) every year after you turn 70½. There are no MRDs for Roth IRAs.3
  3. Once you’ve had a Roth IRA account open for 5 years, you can withdraw your contributions without penalty. A 10% penalty applies on Roth IRA earnings withdrawn before age 59½. That 10% penalty applies to all withdrawals from Traditionals.

So, what does all this mean? Should you convert or not? Several factors are important.

In summary, Roth conversion is likely to have substantial advantages unless you expect to face lower tax rates in the future. And, the Roth’s greater flexibility may make it advantageous even if you expect future tax rates to be the same, or even a little higher.

One word of caution: it may be difficult to compare current and future tax rates. Converting to a Roth now may actually reduce your future tax rates (and make Roth conversion less attractive than at first blush!) – you’ll have less future income because Roth withdrawals aren’t taxable income. This effect may be even larger than you might think – reducing post-retirement income enough may reduce the taxed proportion of your Social Security benefits. On the other hand, Roth conversion can increase your current tax rates by pushing you into a higher bracket, thus making the conversion still less attractive.

If you are seriously considering Roth conversion, seriously consider doing a careful analysis – conversion impacts on both current and future taxes are far from obvious.


1As a very simple example, you can’t convert an employer retirement plan like a 401(k) or 403(b) if you still participate in the plan.
2Unless your plan specifically allows qualified distributions before you retire. I told you this was complicated!
3Inheritors of Roth IRAs (and Traditional IRAs) must take MRDs once they inherit the account.
4Currently, there is no Federal estate tax. In 2011, the Federal estate tax reverts to the rules in effect before 2001.