Report Warns of Cost of Roth Conversion

Converting from a traditional IRA to a Roth IRA might come with a hefty price, according to a new analysis by the National Center for Policy Analysis (NCPA).

Someone who converts to a Roth IRA will have to pay taxes on the traditional IRA amount, either by using some of the IRA funds or other funds, according to a summary of the report. Deciding whether to convert depends largely on the ability to pay the taxes that are due when the conversion takes place.

NCPA says a Roth IRA conversion is ideal for anyone who:

  • can pay the taxes using money from nonretirement funds;
  • expects their federal income tax rate when they retire to be much higher than it is today—because their income will be higher and the burden of government will be higher; and
  • faces little to no federal income tax burden today—so that a conversion would cost very little to complete.

The NCPA analysis includes a table that explains what a Roth conversion would cost in taxes.

“Whether you choose to convert to a Roth IRA or not depends on your preferences for paying taxes, as well as your expected income during work and retirement,” said Pamela Villarreal, NCPA Senior Policy Analyst and co-author of the report, in the summary. “However, the new rules for Roth IRA conversion at least provide people with more choices regarding their retirement savings.”