Should You Convert Your Traditional IRA to a Roth IRA?

Roth IRAs offer a unique combination of benefits that include:

• Immediate tax-free access to contributions, conversions and qualified rollover contributions.¹
• Tax-and penalty-free withdrawal of earnings.²
• No required minimum distributions (RMDs) prior to your death.
• Qualified distributions that are not included in your income for determining if or how much Social Security benefits are taxed.
• No taxes on qualified distributions for your beneficiaries from an inherited Roth IRA.

¹10% federal tax penalty may apply to withdrawals of assets that came in as conversions, or qualified rollover contributions, that have been held less than five years unless a penalty exception applies.
²Must be a qualified Roth IRA distribution.

Who Can Do a Conversion?

Effective January 1, 2010, anyone can as the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) removed income restrictions – along with restrictions on taxpayers who are married and file taxes separately – on conversions from traditional, SIMPLE and SEP IRAs, and qualified rollover contributions from 401(k)s, 403(b)s and other employer – sponsored retirement plans, to Roth IRAs. In addition, taxpayers who convert in 2010 will be allowed to choose between including the entire conversion or qualified rollover contribution amount in their 2010 taxes, or reporting 50% in 2011 and 50% in 2012.

NOTE: Some states have not yet adopted the federal rules, and there may be conflicts between federal and state tax treatment. You should consult your tax professional for your state’s tax rules.

Things to Consider Before Converting

Whether or not a conversion or qualified rollover contribution to a Roth IRA makes sense for you depends on your situation, so discuss these questions with your financial representative and tax advisor before making a decision:

• Have you made non-deductible contributions to a traditional IRA, or after-tax contributions to a 401(k), 403(b) or other employer-sponsored retirement plan?
  If so, only a portion of the amount you move into the Roth IRA will be considered a return of the after-tax amount. A pro rata formula will be used to determine which part of the assets is taxable. It is not possible for you to move only the non-taxable assets.
• Can you pay taxes without tapping into your retirement assets?
  Most experts agree that if you must tap into your existing retirement assets to pay taxes, moving some or all into a Roth IRA probably won't be worthwhile because you will be forfeiting the opportunity to continue growing those assets on a tax-deferred basis and may incur a penalty.
• Will you wait 5 years or more to begin withdrawing your money?
  Once the Roth IRA has been held for 5 years, you can withdraw the assets that were initially moved in at anytime without penalty. Also, after 5 years, you never have to pay tax or penalty on qualified withdrawals of earnings from your Roth.1 So the longer your Roth IRA grows, the greater benefit it offers over a traditional retirement account. Furthermore, required minimum distributions (RMDs) do not apply to a Roth IRA before you die. This can be a big advantage if you plan to hold all of your Roth assets past the age of 70½ (when RMD requirements come into effect for traditional IRAs) to, for example, pass them along to your heirs.
• Do you expect to retire in the same or a higher tax bracket?
  A conversion or qualified rollover contribution to a Roth IRA may pay off if you'll be in a higher or even the same tax bracket as you are now because your tax benefit will come in retirement when your tax rate is higher. If you expect to retire in a lower tax bracket, you may want to consider staying in a plan that gives you your tax benefit before retirement when it can have the most impact.
• Will you pass your IRA on to your heirs?
  A Roth IRA offers substantial estate planning benefits as there are no taxes on qualified distributions for your beneficiaries from an inherited Roth IRA.

Making the Decision

As you see, multiple factors go into deciding whether or not to convert to a Roth IRA. But you don't have to make this decision alone. Use our Roth IRA Conversion calculator, and contact a Thrivent Financial representative and your tax advisor to talk though your options and make the decision that's best for you.

Thrivent Financial for Lutherans and its respective associates and employees cannot provide legal, accounting, or tax advice or services. Work with your Thrivent Financial representative, and as appropriate your attorney and/or tax professional for additional information.

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