Retirement & IRAs

Should You Convert Your Traditional IRA to a Roth IRA?

Converting a Traditional IRA to a Roth IRA may be a good option for some people, but it isn't right for everyone. Your State Farm® agent can help you weigh the pros and cons of converting and talk with you about your goals for the future so you can figure out what's best for you.

The information below explains the differences between Traditional and Roth IRAs and discusses some advantages and disadvantages of converting. Please also visit our IRA Conversion Calculator for more help deciding what to do with your IRA.

Find an Agent

What's the Difference?

The main difference between a Traditional and a Roth IRA is how they are taxed. With a Traditional IRA, contributions may be tax deductible, but you pay taxes on those contributions and earnings when you withdraw the money in retirement. With a Roth IRA, contributions are not tax deductible, but withdrawals are not taxable if certain conditions are met.

A Roth IRA offers more flexibility than a Traditional IRA because (under qualifying circumstances) you have the ability to take tax-free withdrawals, postpone taking withdrawals or not take withdrawals at all in retirement. You can convert money from a Traditional IRA to a Roth IRA in order to take advantage of that flexibility. (But just because you can, doesn't mean you should.)

Taxable Implications

Incurring taxes is a consequence of converting a Traditional IRA to a Roth IRA.

If you received a tax deduction when you contributed money to a Traditional IRA, you will have to pay the taxes on those funds, along with account earnings, if you convert to a Roth IRA. Whether or not you have the funds to pay the taxes due can be a big factor in deciding to convert.

Although you can pay the conversion taxes out of the proceeds of the Traditional IRA, that's not always the best idea. Not only will it reduce the amount of money you are saving for retirement, but you will also be hit with a 10% tax penalty on the amount withheld for taxes if you are younger than age 59 1/2.

You should also keep in mind that your conversion amount will be considered income, and that may put you in a higher tax bracket. If that happens, you may be taxed at a higher rate than you currently pay. This may also cost you some of your current tax credits and deductions.

Tax credits and deductions that may be affected by a conversion include:

  • Child Tax Credit
  • Education - Reduced financial aid ability
  • Itemized Deductions
  • May owe more tax on Social Security or may pay more for Medicare
  • May require payment of estimated taxes to avoid penalties
  • Traditional Contributions – may cause you to exceed income limits to deduct Traditional contributions

In addition, if you convert to a Roth then withdraw any converted amounts within 5 years, you will generally have to pay the 10% tax penalty on the converted amount withdrawn which was attributable to taxable amounts from the original conversion.

These additional tax expenses may make a conversion too costly to be worth your while.

Your taxable income and tax rate at the time of conversion are other important factors to consider.

If you think tax rates will be higher when you retire, you may want to convert to a Roth IRA and pay taxes now. Paying taxes on the taxable amount you convert at today's lower tax rate could be a real retirement advantage.

If you think you will be in a lower tax bracket in retirement, the taxes you pay by converting today could end up being higher than the taxes you'd pay when you're ready to make withdrawals.

You should consult a tax adviser for assistance.

Advantages of Converting

One of the advantages of a Roth IRA is that you can take out the amount you contributed for any reason without paying taxes (as it is already after-tax money). You can take out the earnings without paying taxes for qualified distributions.

Roth IRAs also have significant benefits for estate planning. The funds remaining in the account after your death are generally passed on to beneficiaries free of taxes if you held a Roth for at least 5 years. Because you don't have to take withdrawals in retirement if you do not want to, you may be able to leave more of your estate to your beneficiaries tax-free than with other types of retirement accounts.

If you suspect that you will be leaving a large estate, converting your Traditional IRA to a Roth account may give your family big benefits down the line.


Neither State Farm nor its agents provide tax, legal or investment advice. Please consult your own adviser regarding your particular circumstances.