What considerations are there for a Traditional to Roth IRA Conversion?

  • If your income, and thus your tax bracket, drops in the future, you could pay more in taxes to convert now than you would save by eliminating taxes later.
  • If you have to use money from your Traditional IRA to pay for the conversion taxes, you'll give up the chance to have that money grow and compound tax-free.
  • If you'd like to reduce the tax impact of a conversion, you can do a partial Roth conversion. But keep in mind, the amount you convert is generally considered taxable income; that is, you can't choose to only convert your nontaxable assets (and leave your taxable assets in the account).
  • If you're under 59½, withdrawing money to pay the tax bill for a backdoor conversion would also incur a 10% federal penalty. (State penalties may also apply).
  • Ideally, you will have cash on hand to pay the income tax owed as a result of the backdoor conversion. If you need to sell appreciated assets to pay the conversion tax, the additional capital gains tax also reduces the benefits of a Roth conversion.

Axos Invest is not a tax advisor and this should not be construed as tax advice. Please consult your tax advisor before making any tax-related decisions.

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